Financing a Startup Through Unconventional Sources

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There are some frequently overlooked financing sources for start-up businesses experiencing difficulty with customary lenders. These lending avenues provide unusual financing terms that are designed to help you succeed.

The Small Business Investment Company (SBIC) Program, sponsored by the US Small Business Administration (SBA), provides venture capital arrangements for start-up businesses. There are over 400 privately owned SBICs that are licensed with the SBA. Investments are not conducted directly from the SBA. Instead, an SBIC invests money it has raised privately plus the funds it has borrowed at favorable rates under an SBA program.

Many SBICs concentrate on businesses at a particular stage of development or focus in a distinctive geographic area. An SBIC may provide capital as an equity investment, loan relationship, or combination of both.

A start-up business should locate a “Participating Securities SBIC” since these organizations are experienced with early stage operations. They can provide equity capital as well as loans. A financing structure is designed that’s most advantageous to startup businesses for avoiding a significant burden for interest payments.

The SBA’s Microloan Program provides small loans to business for various purposes, including equipment purchases and inventory costs. The SBA doesn’t make the loans directly. Nonprofit intermediaries administer the program. There are currently 170 nonprofit organizations supplying funding to small businesses.

Micro loans are particularly useful for startup companies, which have lower capital and limited operating history. The maximum micro loan is $35,000 and the average amount is about $10,500. Repayment terms can range up to six years.

Many regions also have other micro loan programs that are backed by state or local governments. Plus, there are several micro lending organizations that provide financing anywhere and permit online application. Several companies sponsor peer-to-peer lending on the internet. These systems arrange for you to post your borrowing opportunity online and have individuals with capital release funds to you.

There are fees for all of these unconventional sources of small loans and the interest rates tend to be higher than banks. However, these sources are familiar with the financial requirements and experience of startup companies. In addition, the low collateral requirements of these programs benefit start-up businesses that are using borrowed funds for operating capital instead of asset acquisition.

Whatever financing sources you seek to utilize, make sure you have a complete understanding of your market, competition, and capacity to generate sales. You must accurately plan for the cash flow requirements of such matters as acquiring inventory, marketing, order fulfillment, invoicing, and waiting to get paid.