For startups, credit is like "experience" for job applicants -- you can't get it if you don't already have it.
Despite a recent push by banks to give more loans to small companies, only the strongest small firms, with cash and collateral, are receiving loans and lines of credit, reports the Wall Street Journal.
Fledgling small businesses looking to land a loan from a bank confront a Catch-22: banks refuse to cut a check until they see evidence of positive cash flow, but startups can't boost sales until they secure capital to launch their products or services.
In the current economic climate, entrepreneurs have to do what they do best: get creative. Now, more than ever, small business owners are looking to non-profits, professional investors, to the government and even to ordinary folks in their community to bootstrap their businesses. Thankfully, an array of organizations and online tools can make this search easier.
Here are 8 ways to fund your business without going to a bank:
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Crowdfunding
Are there people in your community who you think would be willing to invest in your business idea? Need a way to reach them and handle the logistics? Try crowdfunding.
Here's how it works: entrepreneurs use a <a href=http://blog.webdistortion.com/2010/07/18/9-crowdfunding-websites-to-help-you-change-the-world/>crowdfunding site</a> to build personalized web pages through which they can raise money from their friends, family or anyone interested. Often, investments can be as little as $1. When the business turns a profit, investors -- hopefully you'll attract a lot of them -- receive a cut of the profits in proportion to their investment. And each person's risk is low because he or she is part of a "crowd" of investors.
The most prominent crowdfunding site is <a href=http://www.kickstarter.com/>Kickstarter</a>, which bills itself as the "largest funding platform for creative projects in the world." In order to receive funding on Kickstarter, users must set a funding goal for their projects and then reach or exceed it, or no money changes hands. The site charges 5 percent of the funding goal if it is reached, and nothing if it is not. Kickstarter <a href="http://www.economist.com/blogs/prospero/2010/10/crowd-funding_art" target="_hplink">made headlines</a> when one of the projects posted to its site raised $10,000 in just 39 days.
Other sites like <a href=http://www.profounder.com/>Profounder</a>, which is currently in private Beta, aims to make crowdfunding easy for ordinary business owners. They'll assist in creating legal documents that will make the investments official and the terms easy to understand by all. Profounder will also enable users to hold both private and public rounds of investments, collect those investments, keep track of filings, deadlines and bookkeeping, and distribute repayments to investors automatically.
Similar crowfunding sites include <a href=http://invested.in/>Investedin</a>, <a href=http://www.chipin.com/>Chipin</a> and <a href=http://www.indiegogo.com/>IndieGoGo</a>. For fashion entrepreneurs, try <a href="http://www.catwalkgenius.com/" target="_hplink">CatWalkGenius</a>. And for musicians, try <a href=http://www.audimated.com/>Audimated</a> and <a href=https://www.sellaband.com/>SellaBand</a>.
Microfinance
"There may be no opportunity like the present for domestic microfinance to energize small business," <a href=http://www.huffingtonpost.com/gina-harman/were-lending-to-small-bus_b_777909.html>said Gina Harman</a>, President and CEO of ACCION, the largest non-profit domestic microlender in the U.S. Microfinance consists of lending small loans to businesses that don't qualify for traditional loans or other investments. The loan amounts typically fall under $35,000, and are as little as hundreds of dollars in some developing nations, where the model first became popular. Although microfinance in the U.S. has been around since the 1980s, there are only a handful of organizations today that make more than 100 loans a year, including <a href=http://www.accionusa.org/>ACCION USA</a>, <a href="http://www.opportunityfund.org/" target="_hplink">Opportunity Fund</a> and <a href="http://www.Kiva.org" target="_hplink">Kiva.org</a>.
According to the Aspen Institute, domestic microfinance groups loaned <a href=http://www.businessweek.com/smallbiz/content/jun2010/sb20100623_254150.htm>$57Â million in 2008</a> (the most recent data available), up 68 percent from a previous survey in 2002. Small business microloans average nearly $9,000, Aspen's most recent survey found, and are usually capped at about $35,000.
Just over a year ago, Kiva.org launched a <a href=http://www.kiva.org/us-microfinance>microfinance program in the U.S</a>, which recently received a <a href=http://www.kiva.org/blog/2010/10/20/kivaorg-and-visa-partner-to-expand.html>boost from Visa</a>. Kiva's U.S. microloans average $7,000.
For more information on domestic microfinance, keep an eye on <a href=http://www.huffingtonpost.com/gina-harman>Gina Harman</a>, who will be regularly contributing posts on the topic to HuffPost's <a href=http://www.huffingtonpost.com/news/small-business-america>Small Business America</a>.
Peer-to-Peer Lending
Peer-to-Peer Lending or "P2P" is for-profit lending between a lender and an entrepreneur without the intermediation of a traditional financial institution. Pioneered by the startup Zopa in the U.K. in 2005, and by <a href="http://www.prosper.com/" target="_hplink">Prosper</a> in the U.S. in 2007, most peer-to-peer lending takes place on the internet.
But P2P has taken <a href=http://www.nytimes.com/2008/10/16/technology/start-ups/16peer.html>a lot of heat</a> in recent years. <em>Slate</em>'s <a href=http://www.thebigmoney.com/articles/money-trail/2010/01/18/you-are-unlikely-prosper?page=full>Mark Gimein pointed out</a> in early 2010 that Prosper was essentially a "microcosm" for the credit crisis: unqualified borrowers, high interest rates and even higher default rates. Many lenders using Prosper lost money during the Great Recession.
But <em>Reuters</em> financial blogger Felix Salmon <a herf=http://blogs.reuters.com/felix-salmon/2010/01/19/the-problem-with-peer-to-peer-lending/>still has hope</a> for P2P lending site <a href=https://www.lendingclub.com/>Lending Club</a>, which claims to have issued more than $170 million in personal loans and paid out more than <a href=http://blog.lendingclub.com/2010/10/04/12x12-lending-club-issues-12m-in-personal-loans-surpasses-12m-in-interest-paid-to-investors/>$12 million</a> in interest to investors since 2007. Still, be forewarned, this kind of financing can risky for both borrowers and lenders.
Angel Investors
Angel investors are high-net worth individuals who make equity investments in young companies using their own money. To find an angel investor in your locale, <em>New York Times</em>' small business blogger Adrianna Gardella <a href=http://boss.blogs.nytimes.com/2010/06/22/find-an-angel-investor-before-you-need-one/>suggests</a> going to the many networking events they hold.
To search for angels nationwide, the two best online listings of active angels are the <a href=http://bizfinance.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=bizfinance&cdn=money&tm=618&f=00&su=p649.3.336.ip_&tt=2&bt=0&bts=0&zu=http%3A//www.angelcapitalassociation.org/>Angel Capital Association</a> and the <a href="http://www.angelcapitaleducation.org/" target="_hplink">Angel Capital Education Foundation</a>, supported by the Kauffman Foundation. Two very good search tools can be found on <a href="http://angel.co/" target="_hplink">AngelList</a> and <a href=http://angelsoft.net/>Angelsoft</a>. And business incubator programs can also be a great place to find angels (here's a <a href=http://blog.shedd.us/321987608/>solid list</a>).
Finally, make sure to abide by the "<a href=http://online.wsj.com/article/SB118530808497176497.html>do's and don'ts for wooing angel investors</a>" and <a href="http://mashable.com/2010/11/03/investor-funding-tips/" target="_hplink">take this advice</a> from some seasoned veterans.
Venture Capital Funds
Even before you begin your search for venture capital, you'll need to learn how the venture capital game works. Don't you want to know what that VC is <a href=http://blogs.wsj.com/venturecapital/2010/08/27/what-is-that-vc-really-thinking-during-your-pitch/>really thinking during your pitch</a>? First, run to your local library to pick up a copy of <em>Venture Capital and The Finance of Innovation</em> by Andrew Metrick or buy a <a href=http://www.amazon.com/Venture-Capital-Finance-Innovation-Metrick/dp/0470074280>used copy online</a>. Second, keep an eye out for Huff Post's new <a href=http://www.huffingtonpost.com/news/small-business-america>small business section's</a> VC series, in which we'll explore exactly what venture capitalists look for in the companies they invest in. Once you've equipped yourself with the proper VC know-how, sign on to <a href="http://angelsoft.net/" target="_hplink">Angelsoft</a> and <a href="http://angel.co/" target="_hplink">AngelList</a> -- and find your VC.
(Pictured Above: A partner at the venture capital firm Kleiner Perkins announces a $100 million fund to spur the development of applications for the iPhone.)
Small Business Administration Loans
Unlike most of the Small Business Administration's (SBA) loan programs, the SBA's <a href=http://www.sba.gov/financialassistance/borrowers/guaranteed/mlp/index.html>7(m) Microloan Program</a> does not require borrowers to go through a bank. The loans come directly from the SBA, and are administered to business owners via "nonprofit community-based intermediaries." (To find the name of an intermediary micro-lender in your area, visit <a href=http://www.sba.gov/financialassistance/>this section</a> of the SBA's website.) The qualification criteria for these funds are also considerably less stringent than traditional SBA-backed bank loans.
Over the last 18 months, Congress has tripled the amount available for SBA microloans in the U.S. to $75 million nationwide. And in October, the SBA <a href=http://articles.latimes.com/2010/oct/15/business/la-fi-1016-sba-microloans-20101016>increased the ceiling for each microloan</a> to $50,000, up from $35,000. Currently, the average microloan amount is about $13,000, according to the SBA.
(Pictured Above: President Barack Obama and Small Business Administration Administrator Karen Mills deliver a speech)
Community Development Financial Institutions (CDFIs)
<a href=http://cdfi.org/index.php?page=info-1a>CDFIs</a> are financial institutions that provide credit and financial services to underserved communities. They might be community banks, but they can also be credit unions, development loan funds, venture capital funds or community development corporations.
Originally formed in the early 1980s, CDFIs are mainly funded by Treasury and currently manage over $30 billion in assets. Find one of the 1,000 CDFIs in the U.S. at the bottom left of <a href=http://www.opportunityfinance.net/>this page</a> and check out <em>Entrepreneur</em>'s <a href=http://www.entrepreneur.com/money/howtoguide/article52722.html>article</a> on CDFIs for additional information.
(Pictured Above: A CDFI plans to redevelop a community in Louisiana.)
Tap An IRA or 401(k)
You'll likely need the help of a financial planner or third-party <a href=http://www.benetrends.com/home/index.php>retirement-plan administrator</a> for this <a href=http://guides.wsj.com/small-business/funding/how-to-tap-an-ira-or-401k-to-help-fund-a-start-up/>tricky strategy</a>. These professionals can help you set up a C corporation and establish a corporate retirement account. You can then roll outside retirement accounts into the corporate plan and invest the money into your own company's stock, a move that's also called a "self-directed IRA."
Warning: there are serious dangers. This method of financing not only risks your retirement (given that most startups fail), but will likely cost you big money, as advisers charge several big upfront fees to help set up this kind of plan and levy large annual costs. Plus, the IRS <a href=http://articles.moneycentral.msn.com/Taxes/TaxShelters/use-your-401k-to-start-a-business.aspx>will be watching</a>.
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The Huffington Post Nathaniel Cahners Hindman First Posted: 11/04/10 12:40 PM ET Updated: 05/25/11 07:10 PM ET