Just a few years ago, securing a business loan for your new entrepreneurial venture was quite simple. It seemed like everywhere you turned, someone was willing to lend you cash—commercial banks, small community banks, the government, etc. This has changed, however. The Great Recession of the last 3 years has resulted in lenders tightening lending standards considerably. Recently, I tried accessing a simple line of credit at my local Bank of America and I had to show 3 years of revenue and cash flow. Since my company was just started in early 2011, Bank of America proved to be a dead end.
This scenario is common today. It just isn’t easy to get your hands on cash from lenders. The reason is rather straightforward. When a lender loans money, they want to know there is little chance they will not get their money back, and in our current economic conditions, lenders see the probability as too high that they won’t get their money back, so they simply stop lending! Fortunately, there are other options. Although credit is still very tight here in the U.S., there are several alternative methods of raising a working capital loan to help finance your new business venture.
Friends and Family
Borrowing from friends and family is a common place to start when looking for financial help in your small business. If you have friends and family who may be willing to help you out, there are several pros and cons to consider before making the decision to take investment capital. First of all, there is a rule that must never be broken—NEVER take money from a friend or relative who cannot afford to lose that money! This is a non-negotiable. As an entrepreneur, you are most likely very optimistic that your business is going to do well, but you must understand that it is always possible your business could fail due to reasons completely outside of your control. A government regulation could change, the market could change, etc. Therefore, never take a working capital loan or loans from people you are close to unless you have clearly communicated that the investment money or loan could be lost.
Another alternative option is to take on a partner that has cash. Now, it has been said that you should never enter into a business partnership with someone unless you are willing to marry them. All joking aside, business partnerships are not easy. You must have 100% trust and confidence in your potential business partner. A common business partnership model is to have one partner who is the technical/product specialist and one partner who brings the money to the table. So, if you decide to do this, this is a common method of raising capital. The major drawback is that you are going to give up a significant portion of your ownership in the company. Your financial partner is risking capital. You are risking time and energy. Both are extremely valuable. The major question you need to ask is if the business explodes and reaches your wildest dreams, will you be upset if you have given a certain percentage of ownership up. If the answer is no, then take on a partner!