Conventional financing isn't always available. If your business doesn't have a sales history, or you operate in a higher-risk environment, you may find it difficult to get conventional financing. But don't worry – there are other options. Alternative financing might be just what you need.
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Investing your personal savings back into your business will give you the freedom to operate it as you choose. It will also make your business more attractive to potential investors.
Here are some options for raising personal capital:
- Use your personal savings
- Increase your income: get a part-time job, ask for more hours or a raise at work, or rent out a room in your house
- Sell non-essential personal assets: think high-value assets like your second vehicle, property, recreation equipment, furniture, artwork, or collectibles
- Cut expenses or save money: Switch to budget products or make fewer incidental purchases. Small changes can make a big difference
- Ask your credit card company for lower rates on your personal credit cards
Investments from family and friends have lots of advantages: they won't impact your credit rating, there are no service fees, and usually no or very low interest rates. But be careful – they can be a potential source of conflict in your relationships.
An unsecured line of credit will give you access to cash whenever you need it. It will help to resolve short-term cash flow problems, business expansion, or other expenses. You can usually negotiate the repayment terms and interest rates. A good credit history and a good relationship with your bank will play an important role in your negotiation.
Use credit cards with caution – they usually have very high interest rates. Use them only for short-term cashflow, not long-term funding. Responsible use of credit cards can help you build a good credit history and provide short-term access to cash when you need it. Credit card loyalty programs like travel rewards, low introductory interest rates, balance transfer options, and more, can also make credit cards more beneficial.
Also known as crowd sourcing, crowd funding websites such as AlbertaBoostR can help you access loans via small amounts donated by a large number of people – anyone can be a potential lender.
To create a successful crowd funding campaign, make sure you:
- Tell an attractive and engaging story to capture viewers' attention, show them your passion, and convince them to take part in your venture
- Use videos, images, and photos to attract attention
- Network! Crowd funding is based on relationships. Online campaigns can help you get the word out about your project.
- Give your lenders recognition. Plan time to connect with potential lenders and answer their questions. Personally thank everyone that donates, and give investors exclusive perks like early access to your product.
For more information:
- Read the Canada Business Network's guide to crowd funding.
- Check out the Canadian Crowdfunding Directory for a list of all active and beta Canadian crowdfunding platforms
- Learn about the security risks of crowdfunding from the Alberta Securities Commission blog
Factoring means selling your accounts receivables (the money your customers owe you) to lenders. They buy your customers' outstanding invoices as collateral for funding. Factoring is usually only an option for established businesses.
You have two options for factoring:
- Borrow against your accounts receivables, but keep responsibility for collecting. Usually you can borrow anywhere from 65–85% of the invoice amount. With this option, you are still responsible for collecting your receivables (getting payment from your customers).
- Sell responsibility for your accounts receivables. In exchange, you can obtain a short-term loan that generally ranges from 70–90% of the total value of your invoices. Your lender will then become responsible for collecting all outstanding payments from your customers.
Leasing property and equipment (instead of buying it outright) can be a much more attractive option because it involves a much lower initial investment. Your lease rates will depend on your credit rating, and the value and life-span of the assets you're leasing. Make sure you compare options from lots of different companies before you commit to a lease agreement.
Entrepreneurial or small business competitions are organized by nonprofit organizations, business corporations, or government bodies. They are usually business plan competitions, but can also be specific to other aspects of your business, such as environmental stewardship or innovation. Prizes might include cash, recognition, or in-kind support.
Benefits of awards and contests include:
- Unpaid marketing
- New technology tools
- Increased credibility
- Cash prizes
- Mentoring and coaching
Contests happen throughout the year. You can find out about them through:
- Business Link's Business Link Connector bulletin and social media
- Business or industry associations
- Small business periodical magazines
- Newspaper business sections
You can take out loans against your whole life insurance policy or universal life insurance policy.
Whole life insurance policy loans
Whole life insurance policies provide you lifetime insurance coverage, and also build cash value. You can borrow against the value of your insurance by using it as collateral for a loan.
If you plan to borrow against your life insurance in the future, make sure you buy a whole life policy that provides both a death benefit and cash value. If you build enough equity, you can borrow up to 90% of your policy's cash value.
You will have to repay the insurance loan with interest, but interest rates are usually better than regular loans, and there are no credit checks required because the insurance equity is the collateral (any future death benefit would be reduced by the outstanding loan amount).
Universal life insurance policy loans
Universal life insurance policies allow you to build a policy fund by making extra contributions above the monthly insurance cost. The policy fund is then invested, and can grow significantly. Withdrawing money from the policy fund is subject to tax on any growth, but there is no interest on money borrowed from the policy fund.
A home equity line of credit (often called a HELOC) lets you borrow on the equity of your home (the current market value of your home, minus the outstanding mortgage balance), using your home as collateral.
There are two types of HELOCs:
- Fixed rate loans: The loan is repaid over an agreed-upon time period and interest rate
- Variable rate lines of credit: allow you to access cash whenever you need it within a pre-approved limit. At the end of the line of credit's lifespan, you must pay the outstanding loan amount.
Still have questions?
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