4 Options To Start A Business Without A Bank Loan

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An inability to access finance kills off many great business ideas before they even get off the ground. It doesn't matter how great the idea might be, how original the concept is, or how many potential customers might buy your product or service - if you can't put together the money to get started, it's never going to happen. That is a major problem for freelancers and for people trying to leave the world of employment to set up on their own for the very first time. 

The first port of call for anyone looking for a business loan is a bank, but traditional banks aren't always very helpful. If you have no track record in business and, therefore, no way of demonstrating that your business can turn a profit, they are disinclined to lend. They are even less likely to lend if you have had personal issues with cash or credit in the past. You might have the best new business idea anyone's ever heard, but if you defaulted on a credit card three years ago, a bank almost certainly wouldn't give you the money you need to turn that idea into a reality. It sounds crazy, but it is true. 

Perhaps we’re being too hard on banks. After all, if a friend came to you asking for a $1000 loan on the basis that they might be able to pay it all back to you next year if their idea works out, would you give it to them? Lending for a new business is, from a bank’s point of view, like playing UK Online Slots. Most of the money that a player bets on an online slots game is lost. Occasionally you’ll get lucky and land a winner - and the winnings might even be far greater than the losses - but there’s no way of knowing how the bet will turn out until you’ve placed it. If banks operated like online slots websites, they would all be out of business. They’re usually against high-risk lending, and that’s why it might serve both you and them better to look at an alternative means of financing your business - an alternative means like one of the options we’re about to outline below! 

1. Peer To Peer Lending 

This route still involves borrowing money, but it cuts banks out of the deal. Peer to peer lending is a process that connects people wanting to borrow money with people - or perhaps even groups of people - who are in a position to lend it. Typically these people will be involved in or have an interest in the industry you’re looking to do business in, and so they’re likely to have a better understanding of your business model than a bank would. 

Typically speaking, a peer to peer business loan comes with lower rates of interest than a bank loan. They're also open to people who've had credit difficulties in the past - although if you've had credit issues, you can expect your initial interest rate to be a little higher because of it. Go through a reputable broker rather than straight to an individual for your own protection, but there's no reason not to at least give this option a look. 

2. Crowdfunding 

Not every business or business model is suited to this method, but if yours is, this might be the easiest way to get your idea off the ground. Rather than approaching one company or one person for a large loan, you can take small amounts of money from hundreds - if not thousands - of people. The nature of your product or service is of vital importance here because it will have to be something people genuinely want and need for them to be motivated to contribute, but if you can spark their imagination, you might find that the public is more generous than you ever imagined. 

While this method would have been unthinkable a decade ago, it’s become increasingly common during the past five years and is likely to be more common in the years to come. Just remember that you’ll have to ‘reward’ your investors in some way, whether that means a free product or service in return for their investment or a longer-term share in your new company. 

3. Grants 

There might be a grant scheme available to people opening businesses within your chosen sector - and you might not even know it exists. In fact, it's more likely than there is a grant scheme available than there isn't - there are grants and similar programs available for almost every type of business imaginable. Finding the right one might take time, but it's time worth investing. 

Grants generally come from governments, and governments are keen to help small businesses get off the ground because they're the employers of the future. There will be paperwork to fill in, and you might be in for a long wait, but waiting until the money is secure and in place is often better than diving in with borrowed money and being under pressure to make repayments immediately. If you're unsure of where to look, make an appointment with a citizens' advice bureau or a similar service to assist you. 

4. Mortgaged Equity 

We imagine that part of the reason you’re interested in setting up a business alone is that you want to be your own boss. Because of that, bringing in a partner might not appeal to you - especially a silent partner who will take a percentage of your earnings, but won’t be doing any work after their initial investment. You might be able to raise the money you need by, for example, selling 20% of your business to a future investor, but you may not be comfortable with losing 20% of your ownership before you’ve even opened your doors. 

The way around this is to mortgage your equity. You could get the money you need by offering an investor ten, twenty, thirty, or whatever percentage of the company you need to sell to bring money in, and then agree on a deal where you buy them back out of the company over time. It's a form of lending, but there's usually no interest charged as part of the deal because the silent partner is taking a percentage share of profits. You'd need to find the right investor to agree to this deal - but they're out there, and the only thing you lose by looking is time. 

Keep Company Costs Low

Other than all of the above, keep your costs low. Start from your bedroom if you can. Don’t hire anyone until you physically can’t keep up with orders on your own. Do as much as you can online and keep overheads low that way. Getting a new business through its first twelve months will be one of the hardest things you’ve ever done - but it’s possible, and you can do it!

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