Traditional bank financing is often challenging for a small business to secure — especially for start-ups that may not have adequate capital or collateral.
While banks remain a viable source of funding for small businesses, including offering a number of SBA and USDA loan guarantee programs, early stage entrepreneurs may also need to consider alternative sources of funding to help finance a start-up or expansion.
Loans from friends and family are a long-standing source of funding, especially for start-ups.
However, if the financing arrangement isn't well-structured or understood, both business and personal relationships may be seriously damaged.
It's important to be clear on the financing structure, repayment terms, associated risks and whether the deal is a simple loan or involves an ownership stake.
Community Development Corporations (CDCs) can also be a good source of funding for many small businesses. Northern Initiatives and Northern Shores Loan Fund are examples of CDCs that have been very active in lending money to small businesses in Northwest Michigan. Loans are typically $50,000 or less.
Peer-to-peer lending through online clearinghouses like Lending Club and Prosper is available for small loans to borrowers with good credit scores.
Borrowers post their financing needs and solicit loans and terms from individual investors. Loans are typically $25,000 or less.
Another online alternative is crowd funding, a relatively new development that is rapidly growing in popularity.
With crowd funding, the entrepreneur solicits donations from friends, family and fans online.
Examples of some of the largest crowd funding sites are kickstarter.com, crowdfunding.com, and indiegogo.com.
Angel investors are another option to consider for funding.
As the name implies, angel investors provide financing, typically in exchange for an ownership stake.
Angels are seeking a solid return and the option to cash out their investment in a reasonable period of time. Northern Michigan Angels is an example of a local angel investor group in our area.
Regardless of the lending source, the 5 Cs of Credit — character, collateral, cash flow, capital and conditions — are critically important and the borrower must have all five and demonstrate the ability to repay interest and principal on the debt.
For more information and ideas about starting, funding or growing your small business, contact Traverse City SCORE at 947-5075 or toll-free at 888-796-4913.
Visit www.UpNorthScore.com to schedule a free and confidential appointment with a SCORE mentor.
Bryce Dreeszen is a volunteer SCORE mentor and independent business consultant with expertise in retail operations, financial management, and marketing strategy.