How to Fund a Small Business Without Traditional Loans

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I have started three different businesses, and all three were funded in three different ways:

The first business was my law firm. I funded it with a loan from a friend.The second business was my content company. I self-funded that one with sales to potential clients, as well as our own funds and resources.The third business was a website (that I later sold to Mark Cuban). It was funded by an investor.

The moral of the story is that there are, as they say, more ways than one to skin a cat. This is especially true when it comes to funding a small business. Let’s look at five options that do not require a traditional bank loan.

1. Friends and family

This was my first choice for my first business and it is the first choice for many new entrepreneurs for a lot of good reasons: Repayment terms should be easy and friendly. Loved ones typically do not require high interest rates nor strict repayment guidelines. This alone makes this option incredibly attractive.

But there are risks. Dinner with Uncle Joe won’t be so pleasant if your startup was rougher than you anticipated and you didn’t pay him back in a timely manner. (Note, we did not say there would be no time guidelines, only that they would likely be flexible. “Flexible” is not the same as “never.”)

There are two ways to avoid this unenviable fate. First, structure the payment as a gift, maybe as an advance on an inheritance. That way there is nothing to give back. Second, lacking that option, have the loan formalized by a lawyer and treat it like the professional obligation that it is.

Both you and Uncle Joe will be happy if you manage it that way.

2. Crowdfunding

Traditionally, there were only two ways to fund a business through history. The first was called “debt financing.” Under debt financing. you take out a loan and then you pay it back. Pretty simple.

The second way is called “equity financing.” Here, you sell a portion of the business to an investor/partner. Think Shark Tank. The problem with bringing on a partner is that, well, you will have a partner.

Crowdfunding is altogether different. With crowdfunding, you neither take on a debt nor do you bring on a partner. Instead, the crowd funds your business and in return, you give the crowd some sort of reward. If you open a hand-thrown clay pottery store for example, you could name different pots after your crowdfunding investors. That’s their repayment.

Crowdfunding is a popular method to raise money and create excitement around your new venture. Platforms like Kickstarter and Indiegogo allow you to present your business idea to the public and collect small investments from many backers.

Additionally, crowdfunding not only helps you raise capital, but it also validates your business idea while building a customer base. A successful campaign depends on a compelling pitch and attractive rewards for your supporters.

3. Supplier financing

Here is an idea that few people know about, but which really is quite legitimate and valuable.

If your business involves selling physical inventory, supplier financing could be a great way to get the cash you need to fill the coffers, or, at a minimum, to get the products you need to line the shelves — and without having to shell out big bucks.

Here’s how it works. If you have a potential supplier or wholesaler who believes in you and your vision, you might be able to get them to either A) give you a loan to get started, or B) give you product on consignment.

Why would they do that? Because if it works, they just made a valuable customer for life, that’s why.

4. Barter

Bartering is as old school as it gets, but it is still an option.

I once had a client who owned a construction business that required extended bankruptcy proceedings. We bartered for a year. I helped him restructure his business, and he re-did my house with built-in bookshelves, a cabana, a new deck, and so on. A classic win-win.

These days, barter has gone high-tech with online barter exchanges available. Look into places like BizX and Barter Network.

5. Grants

Grants are an excellent way to fund your small business because they do not have to be repaid. Many government programs, nonprofits, and private organizations offer grants to help small businesses get off the ground or grow. While the application process can be competitive and time-consuming, grants can be worth the effort because they are essentially free money.

Check out sites like Grantify.com or Grants.gov to learn more.

Yes, it can be done

While traditional loans are the common way to fund a small business, they are not the only way. Alternative funding is having a moment and it would behoove you to check out the various options.

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