Entrepreneur featured an interesting article on February 24th concerning the regulatory environment surrounding funding a business startup, and how the amount of capital—and how you obtain it—will inevitably influence what type of business you are involved in. This is why working with an experienced business entity/formation and litigation attorney while forming your business—regardless of how small or large that business is—is crucial, as it can help you with issues that come up later on in the business’ lifespan, such as debt restructuring or commercial workouts.
The vast majority of entrepreneurs do not have savings or retirement accounts to get things started; in fact, most do not even have stellar credit or a bulletproof job history, assets that can be helpful in approaching a bank seeking a loan for your startup company. And without collateral and a high FICO, it’s likely that you cannot obtain a bank loan.
While changes coming to Dodd-Frank are expected—and may one day make it easier for banks to make loans to small businesses—until then, entrepreneurs will have to look elsewhere for their startup capital. Some of those options include the following:
Peer-to-peer lending involves lending to people or entities through online services which match the lenders with the borrowers. These lending companies can often operate at a lower overhead than financial institutions, and thus borrowers can borrow funds at lower interest rates.
While traditionally more expensive than low-interest bank loans, this is still less expensive than many of the payday loan firms. However, this option can sometimes be inflexible and require set daily or weekly payments.
Revenue-based financing involves investors injecting capital into a new business and, in exchange, obtaining a percentage of that business’ gross revenues. Many of these investors expect the loans to be repaid within four or five years. This tends to be a more flexible approach and does not require hard assets.
Reaching out to community banks and organizations—or even online lenders—who offer loan benefits for very specific groups—such as the underserved or specific minority classes—may help you launch your business in a particular area, or as a specifically-labeled minority-owned business.
Some entrepreneurs choose to self-fund, i.e. keep their existing job while they launch their entrepreneurial effort.
Know That Things Have Changed…
It is, arguably, easier to launch a business with less capital than was required twenty years ago due to the existence of modern software and other platforms and services (such as apps) that allow you to operate with minimum on-site equipment.
Attorneys Who Can Help
Starting up a new business can be extremely challenging: you have to ensure that you are complying with countless laws and regulations at the local and federal levels. If you have any questions about business formations, the experienced business litigation and corporate law attorneys at Cloud Willis & Ellis can help. We have offices based in Birmingham and Mobile, Alabama, and we’ve helped countless small business clients navigate a broad spectrum of issues. Contact us today to get started.