As an entrepreneur, it can be difficult to obtain a line of credit for
your small business start-up. Most creditors base the credit line on
your personal credit record, so unless you have stellar credit that you
are willing to put on the line for the sake of your business, you will
be left out in the cold until you can demonstrate that your business is
viable. According to the Federal Reserve Bank of New York, you can
generally apply for a business line of credit after you have at least a
full business plan and pilot programs, or ideally several months of
financial statements after you have been in business. Until then, use
these alternatives to fund your small business.
Friends and Family
If you have an idea that your friends and family believe in, invite them to participate in the business start-up by acting as investors. They are more likely to lend to you at this point than banks are because they know you personally and can base their lending decision on your character and work ethic, not just your business plan. If you take this route, be sure to write out a specific contract that details when you will pay back the initial investment, and under what conditions the investment will be lost.
Peer-to-Peer Lending
When banks and credit unions won't lend to you, turn to peer-to-peer lending websites. When you apply for a loan at one of these, the lender lists your business idea, loan amount and interest rate on its website and allows individuals to lend a portion of your requested amount to you. These loans do not have as strict of credit requirements as traditional banks, but you might end up paying a hefty interest rate because of the added risk. If possible, pay back this loan as soon as you can.
Slow Start-Up
If your business is one that you can start slowly and gradually increase the volume as you have the cash to do so, this is the least risky way to fund the start-up. Just invest a small amount of your own money initially, turn it into profits, and reinvest those. You will gradually increase the amount of money you have to work with and can increase the volume of your sales as you go. When you have built up a steady stream of business, apply for a business line of credit to really launch your start-up.
Purchase Order Financing
The last major type of financing besides traditional small business loans and lines of credit is purchase order financing. In this situation, when you have a signed purchase order from a customer, the purchase order financing company lends you the money you need as working capital to fill that order. This is expensive because the financing company usually takes a fairly large cut, but it can be what you need to build momentum and start earning profits as a small business.