16132456 - loan contract close-up

Small businesses and startups are booming, especially in emerging economies. People from all kinds of backgrounds are making it big in entrepreneurship — some in their own small way. This includes even college students and millennials, who are starting early with realising their startup dreams.

Financing the business is always a challenge for small business owners, however. One of the most important things that any small startup will need to thrive is funding. However, if you do not have the right contacts, right valuation or a product viable enough to back, no one is likely to give you their money even if your idea is worth millions.

In any startup, if there are 100 problems, then money can solve at least half of them. Ninety per cent of startups fail within first five years, and the most common reason is the lack of funding. While there are other reasons as well — such as a product that’s not top-notch, or competitor that is way too ahead — most of the time, money is the main issue behind the shutdown of these startups.

There are many traditional ways of funding a business, like borrowing money from your acquaintances such as friends, parents and relatives. But the drawback of these conventional approaches is that 9 out of 10 times your personal relations with these people will go sour due to money. That is why it is better to not go that way. So what one can one do?

Crowdfunding

There are many successful stories wherein people who went this route raised significant amounts of money for their project. Here is a list of 10 top crowdfunding sites on Entreprenuer.com which you can use to raise money, for instance. The benefit with such sites is that if your campaign gets viral, you are very much likely to get funding from big investors, aside from crowdfunding backers.  Sites like Kickstarter.com has funded over thousands of projects, but one has to keep in mind that it is not an alternative to long-term or institutional funding. It’s usually best for one-off fundraising campaigns, like when you are building your prototype or launching your product for a limited set of buyers.

Also Read: Financing your startup: Can a loan be a better alternative to VC funding?

Credit cards

There is a lot of competition among banks that would want to provide credit to you through cards. You can take advantage of their situation. Many banks are offering great advantages such 0 per cent interest for a limited period of time, rewards on spending a certain amount of money, and so on. You should contact some of the banks available in your city and talk to their representatives. You will get a good deal for sure. Though this is not a permanent solution — considering finance rates can be high — but it can be a good way to get you buy and buy some time to survive in your industry until your financial situation gets better.

Conventional bank loans

I would suggest this method every time, although one major problem is that it is little hard to get approved for a loan, especially if you do not have all the business documentation in order yet. However, if you get successful in getting loan from banks, then you can usually enjoy concessional finance charges. You also get a sufficient period of time to pay your debt.

Get a microloan

Since not every small business is eligible for conventional bank loans, one can also borrow money from alternative lenders in case their loan application form is rejected by banks.

This option is best for those small business owners that need money urgently. Such loans usually get approved promptly, and one can get money within 24 hours of the application. Microloans can get you anywhere from US$500 to US$50,000, for instance.

However, with such benefit, there is of course a cost you have to pay. “Interest rates could be very high as compared to bank rates, so please check the interest rates before applying for such loans.” says Peter Evans, president and CEO of Cashco Financial.

Accounts receivable discounting

Another popular means of financing for small businesses is accounts receivable discounting. This applies to businesses that have clients who pay on a scheduled or tranched basis, or which require certain deliverables before being able to process payment.

Also Read: Crowdfunding corner: 9 steps to a successful fundraiser

A discounting company will essentially purchase a small business’ accounts receivable or AR for at a discounted or lower fee. That particular company will then be the one to collect the funds from the original payor as a third party collector.

This also helps a small business mitigate the risk that the original payor will not honour their payment. Thus, even if your startup will get a smaller amount, you are assured of getting cash on hand.

—-

The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, submit your post here.

Featured Image Copyright: belchonock / 123RF Stock Photo