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I mentioned this article to someone recently who was surprised at the limited number of debt options for startup companies.  I asked her to do some research and encouraged her to come on and comment on the story if she has some other suggestions.  It’s not that we’re discussing the “only” debt options for startups but, rather, we’re talking about the most common options or the solutions that can be employed by the majority.  The answers to all your prayers may not be here but it’s important to clearly understand your options and the beginning of empowerment is to know what can and can’t be done so that decisive action can be taken.

So here we go with our next set of startup debt financing options:

SBA Loan – We’re all familiar with SBA loans and I know they have a bad name with some but, if you’re a startup, don’t discard this option.  Brock Blake is the CEO of Lendio, a free small business resource that should be utilized by any small business owner looking for capital.  According to Blake:

“SBA can be a great option for startups looking for capital.  One of the most important requirements is strong personal credit. With good credit, it’s likely that a startup could get approved for a loan up to $35,000 through the Community Express or Community Advantage loan programs. For larger loan sizes, the business owner will need a combination of strong credit, industry experience, collateral, and a thorough business plan.”

Home Equity Line of Credit or HELOC – I realize this isn’t 2007 so there are not nearly as many HELOC’s being handed out.  However, there are still people who either own their homes free and clear with no financing or they have a lot of equity.  People who have been downsized after several years in the workforce.  Others have inherited a property from parents or grandparents and now they have options to borrow against their new home.  So, despite the fact that approximately 30% of homeowners owe more than their homes are worth, there is still a large army out there with equity.  If you’re part of the silent “equity army” and you’re looking for a HELOC then you may be wise to look at the smaller banks and credit unions since the lending challenges and issues at the big banks are well documented.  Lastly, even though HELOC’s are not nearly as prevalent as they once were, they belong on the list of options.

Peer to Peer Loan aka P2P – I’m still amazed that, with all the requirements involved in being a lender and the burdensome requirements of the SEC, that we still have lenders who are willing to offer small loans like the P2P lenders.  So on one hand they are great.  But if you visit the websites for two of the largest P2P lenders, Prosper and Lending Club, you’ll quickly learn that these loans aren’t cheap.  With closing costs and high APY’s this is not your bank loan with minimal closing costs and a reasonable interest rate.

However, there are tens of millions of dollars of loans being issued through these networks and the default rates are rather minimal.  So they have created models that work.  The downside is that loan amounts are pretty low on average.  Lending limits are usually $25,000 to $35,000 and the average loan sizes that are being approved are much lower than those limits.  You’ll almost always get better terms on a credit card which allows you to use the funds over and over again instead of only once like a loan – and you may be able to get a larger credit limit as well.  P2P loans may not be cheap and they do have their downsides but these are a good fit for the right person.

Contract Financing – This is a relatively new financing option that allows business owners to capitalize on a contract that is either existing or in the beginning stages of negotiation.  Kris Roglieri is the founder of Commercial Capital Training Group and the President of a national commercial finance company who has used contract financing for many clients.  Roglieri explains it like this:

“By having a contact, some lenders can immediately monetize a portion of the fixed payment stream from the contract to fund the small business in order to perform on the contract. This method allows the business to grow effectively and is a far cheaper debt option compared to giving up equity to a lender or investor.” 

The credit of the borrower and financials of the new business are not a factor in determining whether or not a business can access capital from their contract.  Roglieri points out that:

“The underlining factor in a lenders decision to monetize a contract is solely done on the issuer of the contract and their credit worthiness.  Ideally, the business provides a unique technology or service to an investment grade company and has a fixed contract over a period of time.”

So the bottom line is to know and understand what your options are.  After all, how can you make the best decision if you don’t know what your options are and which one or which combination is best for you?  Be sure to check out Part 1 too.  I realize that not every option is here but we welcome your comments.  So to all my fellow business owners keep living the dream!

Home Equity Loan Photo via Shutterstock

From Small Business Trends

8 Ways to Finance Your Startup with Debt: Part 2

View full post on Small Business News, Tips, Advice – Small Business Trends

There’s good and bad news to share about startup financing for a small business.  Keep in mind, we are only looking at debt options so think of loans and lines of credit that you pay back to a lender.  We are not looking at any equity solutions such as angel investors, venture capital, etc.  The good news is that there are options.  The bad news is that nothing is easy nowadays and if you have damaged credit or you’re looking for several hundred thousand dollars it’s much less likely to happen purely with debt.

I have split these 8 solutions into two parts based on the likelihood and value factors.  Simply put, likelihood just asks the question, “How likely is it that this type of financing can be obtained by a higher percentage of people?”  Value is all about how much value would each form of financing bring to business owners who utilized this form of financing.  So let’s get started.

Here are the 4 most likely forms of debt financing for small business startups:

Credit Cards
This is absolutely, positively, without doubt the most common form of financing for small business startups.  Additionally, credit card financing – when it is done right – is arguably the least expensive form of financing.  From a benefit perspective they also do not require collateral like many other forms of financing.  The problem is that when credit card financing is not done correctly – and normally it is not – you will hurt your credit profile, pay too much in interest, you will not properly separate your personal & business credit, and you’ll likely miss out on some good tax benefits.

ROB’s
Technically known as Rollovers as Business Startups – are only an option for people who have saved up some adequate retirement funds.  It’s also much more risky than most other forms of financing.  This is a very popular form of financing for new franchisees.  The downside is you’re risking your future basically since you’re tapping your retirement savings.  The upside is that you can access a sizeable amount of capital if you have a nice nest egg waiting for you.

Trade Credit
Maybe it’s not as popular but it is very common.  Examples of trade credit – which is also referred to as vendor credit – would be a line of credit at Staples, or Dell, or any other company where you need to purchase their goods or services for your business.  There are many forms of trade credit where you can obtain loans and lines of credit that are revolving in nature…meaning the balances are not due in full and can be spread out over several months or several years.  However, the most common “terms” attached to trade credit are Net 30.  So there is not the same value or ability to finance nearly as much since you’re only delaying the purchase by a month or maybe two.

Equipment Financing
Most startup companies need some type of equipment.  Ideally, if the goal is to use your capital in the best way possible, you wouldn’t use a working capital loan or line of credit to purchase equipment.  Sometimes it is necessary but, often times, you can get a loan or lease specifically for your equipment and then leave your cash, working capital loans, and credit cards available for other uses.

With over 15 years of small business lending experience, Kris Roglieri is the Founder of Commercial Capital Training Group and President of a national commercial finance company.  According to Roglieri:

“In the last 4 years, the number one characteristic of defaulted loans or leases in a lenders portfolio were companies that had less than 2 years time in business so most lenders only finance companies that are more than two years in business or their underwriting requirements are very tough and stringent.  If you’re seeking to finance equipment as a startup you should have good personal credit, some experience in your industry, and hopefully at least 6-12 months of liquidity.”

In Part 2 we’ll discuss the other 4 most common debt solutions for startups.

Credit Card Photo via Shutterstock

From Small Business Trends

8 Ways to Finance Your Startup with Debt: Part 1

View full post on Small Business News, Tips, Advice – Small Business Trends