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Unusual Ways to Fund Your New Business

For many entrepreneurs, a new business starts with a trip to the bank. They either present their business plan to the loan manager at their local branch and hope for a line of credit or they head to the Bank of Mom and Dad to ask for an advance on their inheritance. But banks these days are holding onto their cash and not all parents are able to write a check to finance all of their children’s business ideas. If venture capitalists and angel investors aren’t willing to fill the gap, you still have options.

Here are five you’ve never considered.

Talk to a Pawnbroker

Pawning goods to borrow money is almost as old as… well, money. In return for handing over an item, the broker lends you a percentage of the item’s resale value. Pay back the loan with interest and you get the item back. Fail to pay the loan and the broker sells your goods for a profit. Traditionally used by low earners in a squeeze or as an advance on payday, some pawn companies have now grown, migrated online and are targeting businesses. Pawntique, for example, lends between 60 and 70 percent of the value of the items it receives from clients, half of whom are businesses. Loans are typically short term, last for three months and are charged at 3-6 percent per month. That’s significantly higher than current 5-6 percent charged by banks annually. According to Pawntique though, 80 percent of loans are repaid.

Advantage: If you’ve got an asset, you can have the money in as little as a day.

Disadvantage: High interest rates, short terms and the loss of your asset if you don’t pay the loan back.

Get Professional Help

The range of different loans makes finding and choosing the right finance product a real challenge. Different banks offer different kinds of loan, each loan will have a different rate, different criteria and be made for a specific purpose. Time spent sorting through each of the options across different lending institutions is time that you’re not spending working on the product.

A loan adviser can help. Multifunding, for example, will do all the comparisons for you, helping to find a lender that meets your needs. In return, it takes 1-2.5 percent of the loan as a commission. The company claims a success rate of 80 percent.

Advantage: The advisor will do the shopping around for the finances, letting you focus on your business.

Disadvantage: You’ll need to shop around to find the right advisor.

Lease What You Need

Your inability to find funding doesn’t just affect you. It also affects the vendors you’d be spending the money on — and they want to help you purchase or at least use their equipment. If you’re wondering how you’re going to buy some giant piece of machinery to make your unique iPad covers or hand carve your Etsy products, it’s worth talking to the manufacturer about financing the purchase through a lease. Even if they can’t do it themselves, you might find that an equipment leasing company will be able to do it for you.

There’s no shortage of firms that can provide this solution and while it won’t supply you with any cash, it might reduce the payments to a level low enough for you to build up enough revenue to pick up a loan at a better rate. Just be sure to factor the fees for the lease into your product manufacturing costs.

Advantage: A lease can make essential equipment affordable.

Disadvantage: Leases are often more expensive than outright purchases and you’ll still need money up-front.

Ask for a Loan Guarantee

The Bank of Mom and Dad might balk at passing you their life savings but they — or someone else — might be willing to use some of their money to help you raise the cash you need from the bank. A loan guarantor tells the bank that if you can’t pay back the loan, they will.

In practice, of course, it’s both more complicated and more expensive than that. The bank needs to be completely certain that the loan guarantor really does have the funds available to cover the loan and that those funds will still be there when the money is due.

Typically, the process begins with the guarantor moving the money into “marginal securities,” an asset that can be used as collateral. They then need to obtain a letter of credit from their bank promising to deliver the funds to the lender at a fixed date. The fee for that letter is usually 1-2 percent of the value of the loan which is often passed on to the recipient. Loan guarantors may also charge a fee for putting everything together, which can be as high as 5 percent of the value of the loan, but if you’ve managed to persuade someone you know to stand up the guarantee they may choose to waive it. Finally, the bank will charge around Prime plus 1 percent for making the loan, even though they’re guaranteed to get the money back and are taking no risk at all.

Advantage: A loan guarantee makes a bank loan easier to obtain.

Disadvantage: It’s big commitment from the guarantor — and you’ll still have to pay fees.

Offer a Royalty on Sales

Loans generally need to be paid back regardless of the health or situation of the company. Royalty financing gives lenders a share of the company’s sales for a set period or until it has paid a set amount.

It’s a technique that appeals to a wide variety of investors who receive something like short term equity in the business they’re financing. Financial consultancy firms often obtain royalty financing from local business development organizations that are set up to support local firms.

The deals can be complex, with negotiations held over the size of the royalty, the total amount to be paid back and the duration of the agreement — as well as the definition of a sale.

Advantage: As an alternative to selling equity, royalty financing ensures that the company remains in the original owner’s hands.

Disadvantage: Can be complex and the amounts to be repaid may be much higher than the cost of a bank loan.

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