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Small Businesses: How to Think Outside the Financing Box

September 13, 2012

Most small business owners know that it is extremely difficult to secure financing these days.  In fact, a 2011 Pepperdine University study showed that almost two-thirds of privately held businesses did not qualify for the loans they sought. To build your business, you will need money. But to qualify for money in this economic climate, you will have to get creative.

It appears many banks are simply not willing to take the risk—even on applicants with good credit and significant collateral. Before your spark is snuffed out by the apparent financing difficulties facing today’s small businesses, refocus.  Here are some ideas; perhaps one will work for you:

Family and Friends: While it can be tricky to mix business with friends and family, don’t neglect the potential for mutually advantageous partnerships to arise out of relationships you’ve already established.  As in any investment relationship, clarity is absolutely imperative. If you choose to go this route, be professional about it.  Create a contract and get your terms in clear writing.

Crowd Funding: President Obama’s recent JOBS Act loosened restrictions on crowd funding this year—legalizing it for privately held companies—however, nothing is set in stone. The Federal Trade Commission and the Securities Exchange Commission are working on hammering out the securities rules as we speak.

If things go smoothly, non-accredited investors will be allowed to invest small amounts of money (less than $2,000) in small businesses through crowd funding web portals. Keep your eyes peeled and educate yourself. This may be exactly the type of financing your business needs.

Partner Up: Consider finding a partner with important attributes you may lack—in this case, financial resources. There are different types of partnerships out there, so do your due diligence and, as always, be strategic and cautious in your decision-making.

Microloans: A microloan is a small, short-term loan, with more relaxed requirements than traditional bank loans.  The SBA’s microloan program utilizes intermediaries, usually non-profits, to manage and grant loans to businesses. These loans typically come with requirements for technical training. Find out more at SBA.gov.

Use Your Assets: Taking out a second mortgage or refinancing your home isn’t the only asset-based route to consider for financing your business.  Other options include accounts receivable financing, or the selling of unpaid invoices to a third party at a discounted price; equipment financing, which is any financing involved in acquiring equipment; and purchase order financing, where money is loaned to fulfill a sale to a committed buyer when your company does not have the upfront money to complete said buyer’s order.

These types of loans are typically short term, and will only work for certain types of businesses, but they are definitely an option to consider when other routes are out of the question.

Securing financing for your small business is not easy—little about running a business is. The important thing is that it’s not impossible. Open your mind and create a strategy to secure the money that your company needs to achieve success. Check out more of my tips and thoughts on BlackEnterprise.com.

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