8 Ways to Finance Your Startup with Debt: Part 2

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

About the Author

Tom Gazaway is President of Hawkeye Management, a firm that specializes in unsecured business credit lines for small business owners. Through their pre-qualification process and detailed analytics, they match small business owners with lenders who will issue business credit without collateral. Tom also blogs at The Small Business Lending Blog.

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Source: http://smallbiztrends.com/2012/01/8-ways-to-finance-your-startup-with-debt-part-2.html

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