Start-up funding, Four alternatives to bank loans

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You have started a new business and have worked out your start-up and operational costs for your first year. Now you need funding to move your business forward.

Banks and other financial institutions are tightening accessibility to loans but there are other ways to secure funds that you can explore:

1. P2P lending

These are platforms where business owners and potential investors can meet. When you register you have to provide basic information such as the amount of money needed, the reason for the loan, the net income of your business and so on.

Lenders will then match you with potential investors after carrying out a soft credit pull on your finances (this will not affect your credit score). Major P2P sites in the UK include Funding Circle, Zopa, Lending Works and Ratesetter.

It's important to make sure you have good credit, as a less than ideal credit rating can mean that you will get stuck with high interest rates which will cost you more over time. It is better to wait and improve your credit before applying.

2. Crowd-funding

Crowd-funding is a way to raise the money you need by attracting investment from a number of individuals who each provide a small investment. Crowd-funding is a growing market and has become the new normal for loan seekers that need funds for their businesses.

You will need to set up a campaign telling your story, set a financial goal and promote your campaign extensively. If you do not meet your goal, you will forfeit all pledged money.

3. Get yourself a partner

A business partner will share the financial burden with you but they will do more than just bring money to the table; they come with fresh ideas and help with the running of the business. They will also share the businesses’ responsibilities with you. This option is often a better bet than an outright investor who may want to dictate your every move.

You will have to draw up a legal agreement stating exactly what you each bring to the table, your individual responsibilities, ownership stake, profit-sharing percentages and a strategy to handle situations where any party wants to leave the business. You do not want a war to break out between you and your partner as it is potentially destructive for your business.

4. Bootstrapping

Another option is use your own money to fund the business. This will give you time to test the viability of your business idea in real market conditions without an investor or financial institution breathing down your neck.

Make sure though that the money you put into the business is not going from your account directly into the business. Operate from the funds you put into the business account and as soon as is possible, move your business away from the sole proprietorship model so that you are not directly liable for the business.

Source: Startup Donut

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