As a solopreneur, it’s important to align yourself with a banker who can help you vet your ideas, make introductions, and assist with collecting money and processing payments. But when you’re starting out, a bank may not be the place where you first obtain financial assistance, no matter how strong the relationship with your banker.
Banks require a great business plan, the right experience, established collateral, plus a variety of other things before they’ll approve a loan. So, if the bank won’t provide you with a loan, how do you finance your business? Here are seven alternatives.
1. Your own savings
Let’s start with your personal capital. Because it took time and effort to obtain this money, you may be a little more cautious with these funds, whether it’s your savings, borrowing against your assets, house, 401(k), or other investments.
When looking at your savings, note that you have already paid taxes on this money. If you’re loaning it to the business entity, you should set up a formal financial note. The IRS may want to see this document, and your attorney can help you create it. Include the loan amount, interest rate, duration of loan, and consequences of nonpayment.
2. Credit cards
Sometimes solopreneurs pay for items on their credit cards, but it’s important to take into consideration the high compounding interest rates. Most who put money on credit cards roll the dice, hope for the best, and often fail. They shift their balance from one card to a new one that has zero interest rate for six or twelve months. This is a shell game and has questionable fraud concerns that can come back to haunt you. And if the business doesn’t work, you could be paying off that debt for a very long time.
3. HELOC
Another option is obtaining a home equity line of credit (HELOC) against your home. You would personally get the home equity line of credit and then loan the money to the business.I suggest this option before using cash, because the cash can remain as a backup and the interest rate is often better than a bank loan, since it’s collateralized against your home. If the arbitrage is not much between the HELOC and a bank loan, take the loan from the bank. If you’re only going to borrow money once to start and keep your head above water for the first six months, a HELOC may be the best way to go.
4. Leasing and corporate credit
If your business requires equipment, computers, or vehicles, you can explore leasing or a credit option offered by the supplier. Most companies will have internal leasing agreements, work with leasing associations, or have internal or external credit options. It’s not uncommon that this may cost more, but again you can write the expense off as a deduction against pre-taxed income of the business. Consult with your accountant if you’re unsure how to calculate the total obligation. Decide if this expense is a need to have, should have, or nice to have on this solopreneur business you’re on.
5. Family and friends
If you borrow from friends and family, use an attorney to create a specific, legal, binding loan document (note) so that both parties understand the loan and expectations. Address the terms, when you will pay back the loan, expectations for inspecting the financial books, and what the recourse is for nonpayment. Do this before the funds are dispersed. In the future, if you need to review the document, you will want to know that it was created at a time when everybody was in a positive frame of mind. Have a hard conversation about worst case scenarios. Be open and honest.
6. Financial partner
A financial partner could be an individual who is happy to own a part of the business or give you a loan at a little higher interest rate. It could be a business that wants to offer you a loan to help you get started, then contract with you in exchange for a discounted rate going forward for your time. With financial partners, it’s important to create a form of accountability, communication, and expectations early on in the process. This should include your expectations of what they are contributing in terms of funds—and their expectations of you in terms of time, deliverables, and repayment plans.
7. Payment in advance
Early on, you may target client accounts and contracts that people may be willing to pay you in advance. This can be another option to set you up for funding your launch. If you plan to be a specialized contractor for a larger firm, you might be able to ask for the first three months of payments in advance for a 10 percent discount, discounted office space, or some other variation. The negotiation options are unlimited! Don’t be afraid to ask questions or negotiate, because you never know where opportunities may arise. Again, create legally binding contracts early so you can control expectations.
Kris Kluver is a seasoned solopreneur who has been directly involved in the creation, operation, growth, and occasional sale of more than t20 successful businesses. This article was adapted from Kluver’s book, The Aspiring Solopreneur: Your Business Startup Bible. It was syndicated by MediaFeed.org.
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