Alternative Sources of Financing
by Wendy Priesnitz

Q: Since I probably won't be able to get a bank loan or line of credit to start my new micro-business, what other sources of financing are available to me?

A: I hope you're not writing off a bank loan before you try. Banks have been trying hard in recent years to become friends of the small business sector. Among the factors they will consider before giving you a start-up loan are: size of business, ability to service debt, the strength of your personal guarantee or other security, your debt to equity ratio, the credibility of your income and expense projections, and your management experience.

Any lender or investor will also expect you to invest in your own business. This can include personal savings and so-called sweat equity, which is your investment of time and labor.

Another important source of start-up capital is individuals who are often called angels. These are simply wealthy individuals who invest amounts up to $100,000 in small companies. Most angels do not want to control your company, but they want equity and they usually require high returns. Most will insist on a formal shareholders agreement and input into major management decisions.

Friends and relatives often invest in businesses owned by family members, associates and friends. This so-called love money carries implications for your personal relationships and can be quite emotional.

Suppliers and customers are an indirect source of capital. Careful management of the balance between current accounts receivable and accounts payable can liberate your cash flow. You may be also able to negotiate with suppliers for increased discounts and better terms. In addition, financial intermediaries called factors will allow you to convert your receivables into capital.

You should also consider leasing as an alternative to debt. Some very small start-up companies use credit cards as a way of obtaining small scale debt capital. Be cautious, though, because while convenient, credit cards bear relatively high rates of interest.

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