Getting funding for a startup business is no longer a simple case of heading to the bank with a great business plan and expecting them to hand over the cash. With the credit crunch and housing bubble having wreaked havoc on the economy and with businesses small and large struggling everywhere to stay afloat, financial institutions are not quite so keen to open their wallets to new ventures at the moment. Consequently if you are attempting to get a new business started and are out there trying to get some funding for that business you are going to find things a little more difficult than normal. Most banks have been told by the government to release some funds to new businesses (in order to try and kick-start the economy) but have in fact decided to do the opposite and have tightened the purse strings. Your best bet is to bypass the banks and regular financial institutions altogether and think outside the box a little. There are alternate sources of funding out there if you know where to look. This article will offer some suggestions to get you started:
Peer to Peer Lending
Peer to Peer Lending (also known as Social Lending) is one of the first places that the modern startup company should think about looking, even before they try the banks or other regular financial institutions. That’s because it has become incredibly popular lately as a way of bypassing the banks completely. Peer to Peer (P2P) lending is a new form of online lending whereby a P2P website will act as a kind of broker between you, the borrower and people who want to lend money. How it works is that you will fill out a form on the site that details just how much money you want to borrow, the type of loan you are looking for, the repayment schedule you are looking for and (ideally) the interest rate you are willing to pay. The P2P website will then attempt to match this loan requirement with a lender (or lenders) who are looking to loan a similar amount at a similar rate. If one person cannot match the entire amount they will combine two or more lenders to meet your loan. The final rate of interest that the site (and lenders) are willing to lend you will depend on things like your credit rating. Best of all the P2P site takes care of all the legalities and paperwork and no banks are involved whatsoever.
Crowd Source Funding
Often confused with peer to peer lending, crowd source funding works in a similar way with a number of people online all handing over small amounts of money to your business. Individuals will choose to hand over as much, or alternatively as little, as they want to your company, depending on how much they think your business plan or idea is going to be successful. However, crowd funding differs from normal loans in that it comes down to the lender’s belief and passion about the project, rather than a pure cash investment. Normally the loan will be for something the lender follows as a hobby or enthusiast, such as a comics fan lending money to an artist he likes to form a new comic company. Rather than only asking for money back, they might offer a deal wherein the comic fan gets a character named after them in the new comic. Similarly someone might donate to a film project in return for their name in the credits. This kind of investment very much depends on the type of business / project asking for the loan.
Purchase Order Funding
PO Financing is a type of loan specifically aimed at companies who are involved in the distributing or wholesaling business and who are experiencing shortfalls in their cash flow. PO financing is an innovative type of business loan that allows a company to raise funds based on outstanding orders from customers. As long as the company has proof of purchase and orders waiting to be fulfilled, they can go to a PO funding company and get a loan in advance of those orders.
Finally there are all kinds of sites online that can put you in touch with Angel Investors in your area. Angel Investors are investors who will put money into a business (normally a dot com business) if they think it is likely to do well. In return for a large cash injection they will normally expect equity in the company.
Alison is a finance journalist and business blogger. She writes about all areas of personal finance from credit cards to taxes to business loans. She also writes for a pay day loans uk blog.