You have the idea and you have the motivation, but do you have the money? The credit environment right now stinks and you aren’t thrilled with the idea of applying for business loans. Fortunately, you have other options for raising seed capital. If you are creative-minded and determined, you can locate the money you need to start your business—without asking a business bank to help.
Tap angel investors
Angel investors are wealthy individuals who deploy their money in business start-ups. They don’t do it because they’re nice people; they do it to make money. A successful small business start-up can provide an investment return that’s well in excess of what exchange-traded stocks or bonds might produce.
Angel investors do not hand over their money casually. Expect to provide potential angel investors with all the documentation you’d give the bank when applying for a loan, such as your business plan, financial projections, market research, product data, etc.
You will have to share decision-making authority with your angel investor. She may ask for a board position, for example, and will place restrictions and stipulations on future corporate actions. Retain an experienced attorney and accountant to assist in negotiating and documenting the arrangement.
A second alternative is to team up with friends who share your business interests. If you can rally a group of entrepreneurs, you can ask each individual to be responsible for raising a certain amount of funds. In return, each will get a slice of ownership in the company.
Partnerships among friends can get messy when the arrangement is handled too casually. Document the terms of the arrangement before money changes hands. Define the management and financial responsibilities of each partner. Clarify who has the final say on corporate decisions, and decide what to do if someone wants to cut ties with the company.
Lock in one big contract
When you don’t want to share your management role with investors, you can find a customer to pay your start-up costs. Many a small business has begun with just one contract. To make this work, you’ll have to be meticulous about your financial and operational planning. Your customer doesn’t want to know that she’s financing your start-up; she only wants to know that she’s giving you a deposit for the delivery of goods or services. This means you can’t screw up: don’t underestimate your costs, don’t miss your deadlines, don’t give your customer any reason to suspect that your business isn’t completely stable.
Dabble in alternative finance
Websites like LendingClub.com can also be a source of business funding. LendingClub and its competitors facilitate peer-to-peer lending marketplaces. Through the site, regular folks who have money can make loans to regular folks who need money. You would visit the site, set up a profile and define the parameters of your loan. Peer lenders review the profiles and invest small dollar amounts in the opportunities they like. When your loan funds, the money will come from a group of individuals, each of whom pledged a portion of your loan request.
Credit requirements vary for peer loans. Expect peer lenders to evaluate your credit qualifications and your business idea before committing to your loan request.
Use existing credit lines
No doubt you’ve already considered using your personal credit cards to generate seed capital. This may be the easiest and fastest way to generate seed funding, but it can get expensive. To keep a lid on costs, try to use the card more for purchases rather than cash advances. Call your card companies and ask about rate promotions. Watch for mail from your card issuers; sometimes they’ll send out checks that you can use to draw money against your account at a lower rate.
A loan against your permanent life insurance policy could be another attractive option. You will be limited to borrowing only up to your policy’s cash value. The good part is that your insurance company isn’t going to press you for immediate repayment—mainly because the loan accrues more interest when you take longer to repay. Just have a plan to repay it eventually, because otherwise you could run into tax problems down the road.
Ask your elders, the right way
Finally, you can ask your wealthy, older relatives for the seed money. The trick is to present it as an opportunity, not a loan request. Pitch your Great Aunt Selda on the idea of investing in the family and earning a nice return in the process. Do your homework on loan rates and offer Aunt Selda a competitive rate on the borrowed funds. Draw up an agreement that defines the loan amount, interest rate and repayment terms. Going forward, do what’s necessary to stick to your agreement. At her age, Selda can’t afford to lose a bunch of money on a family loan gone bad.