Despite the challenges of starting their own business, entrepreneurs love to face the challenges of reaping the rich rewards that await them to complete the project successfully. Finance is the lifeblood of companies, and adequate financing is one element that contributes to business success. Having a good business plan is essential for providing the blueprint of the business and arranging finances as lenders evaluate the business potential based on the business plan, explains Saivian Eric Dalius.
But startups face an uphill task to arrange for finances because of the lengthy process of obtaining traditional loans, and the problem is much more for those with poor credit. Although there is no defined cut-off for the minimum credit score required to qualify for a business loan, traditional lenders set standards that are often not easy to fulfill.
However, entrepreneurs who cannot offer collateral to lenders and have subpar credit scores can explore alternative options of borrowing that are now gaining popularity.
Approach the community development finance institutions
Numerous CDFIs or community development finance institutions, non-profit organizations provide capital for small businesses across the country at reasonable interest and terms. Many ambitious startups and several other micro-businesses approach these institutions for business funding. Instead of relying on credit scores, the CDFIs evaluate if the owners who seek loans are fiscally responsible. Even if unfortunate things happen later, the lenders try to understand the incident and assess its relevance. They look deeper into the borrower’s account to understand the compulsions that resulted in a distortion of the financial account, some of which might have valid reasons like job losses and medical expenses, all of which can be explained.
Another way of accessing funds is to induct a partner for your business who puts in his money in exchange for access to your staff, product, distribution rights, as well as sales of a combination of a few of these. This type of funding is more like an equity sale and not a loan, but sometimes it can be based on royalty when the partner receives each piece of product sold. Usually, the chosen partner is a large business in the same or similar industry that can strengthen the business operations and assure faster growth as the customer base expands instantly.
Venture capitalists are companiesthat have a bagful of money to invest in some business while acquiring a part of the ownership of that company. Startups especially can take advantage of VCs as they lack the collateral required for traditional funding through loans. However, VCs are interested only in businesses that demonstrate high growth potential and have captive customers or patents that give them a competitive edge.
Angel investors are individuals interested in investing in some early-stage business or start-up that need not demonstrate the growth potential demanded by VCs. The benefits of such funding are the same as those of VCs but at an individual level.
Crowdfunding is another method of garnering business finance that small businesses can use to their advantage.