As an entrepreneur, you put your blood, sweat, tears and soul into your business hoping that it will become a successful, self-sustaining entity. While each person's perception or measure of success is different, the bottom line is that all businesses live and die by one word - cashflow. You have it? You survive to grow and hopefully prosper. You don't have it? You are dead in the water.

With so many articles out there talking about the rough economy and the potential doom and gloom that might await us, I will spare you the tragedy reporting and say it is a great time to start a business. Many people I have met started new businesses because they were laid off or started a side business that turned into a full time job that was paying better than their day job. When we start our business we have dreams that are lofty and some times unrealistic. Don't get me wrong, vision and drive are at the core of the entrepreneurial spirit that has become the innovation engine moving the entire world forward. Still, you have to keep your feet on the ground.

The big challenge becomes when you look to grow and need to expand your business. This could be with new employees, larger office space, or better equipment just to name a few. Even though it is a great time to start your business, traditional sources of financing are a bit harder to come by even if you have been in business a while and have great credit. So I took at look around and found a few creative alternatives to finance your small business. In this four part series, I will cover alternative sources such as:

    Creative Ways to Fund Your Small Business
  • ARC Loans
  • Retirement Fund Lending
  • Peer-to-Peer Lending
  • Credit Cards
  • Asset-Based Loans
  • Microloans
  • Factoring and Accounts Receivable Financing
  • Purchase Order Financing
  • Equipment Lease Financing
  • Mini-Bonds
  • Venture Capital Financing
  • and a few others....

First up are ARC Loans, Retirement Fund Lending and Credit Cards. So let's get started.

ARC Loans

American Recovery Capital (ARC) Loans are a new thing and come from the stimulus package of 2009. The program is described as "a program was designed to help “viable” as defined, small businesses who are suffering “immediate financial hardship” also defined. In order to be considered viable, the business must show that at least one of the last two years the company was profitable. It further requires that the outstanding loan(s) from a credit institution may not have any payments more than 60 days past due." It can be made up to $35,000 but it is not for startups or change or ownership situations (sale of business). According to the site "The requirement of immediate financial hardship would need to be fully documented for these kinds of financial conditions; trouble making personnel payroll, slowdown of sales, bank refuses additional credit on loans, trouble paying debts etc. Evidence of these conditions must be shown in excruciating detail. So it is necessary that the borrower has very good accounting in place in order to run the necessary financial reports." For more information check out this analysis on ARC Loans and for additional details contact the SBA.

Retirement Fund Lending

I know, I know. Use the 401K? Raid the nest egg? Won't I pay dearly when the tax man comes? If you do this wrong you risk paying taxes on your retirement savings as well as facing hefty penalties. There are dangers to using your retirement account to fund your business and you should be very cautious about using your nest egg for a business. However, such investments fall into a gray area of the law, according to tax experts. The way it essentially works is that you create a C Corporation and establish a corporate retirement account. You can roll outside retirement accounts into the new corporate plan and invest in the company's stock. Clever, isn't it? Not so fast. There are certain size requirements, administrative fees and most off all, getting an expert to do this for you.

According to the Wall Street Journal, they recommend the following:

“A nonexpert would likely need the help of a financial planner or third-party retirement-plan administrator. These professionals set up a C corporation and establish a corporate retirement account. A person can then roll outside retirement accounts into the corporate plan and invest the money in the company’s stock. Since the person is buying shares of his or her own business, he or she is effectively feeding it money.”

So tread lightly on this one because while it may seem like a sure fire solution, it is not for everyone.

Credit Cards

Ah yes, the infamous credit card. This one is a slippery slope because many people when they start a business don't have enough history to get credit and do one of two things - personally guarantee a business credit card or worse, use their personal plastic. I was guilty of this myself and put myself into quite a predicament, to the tune of $80,000, and used personal credit cards to fund the business. I would not recommend that route to anyone. In some ways, credit cards can hurt your chances of success in long run. However, there are merits to having a business credit card, like helping establish a business credit history. So if you decide that this a strategy for your business, there are a few things you should know about small business credit cards:

  • You need to have your personal credit clean and in good standing.
  • Research which card is right for you. There are many choices with different rates and rewards.
  • Know when you are going to pay them off. If you aren't disciplined it will come back to haunt you.

The most important advice for any type of financing is that you should build a business with the cashflow you know and not the cashflow you dream about.