Published March 2, 2010

What to Do When You Lose Funding

Starting up a small business requires funding, and the need for financing is persistent through every growth stage. Entrepreneurs look for small business financing, usually in the form of loans and lines of credit and sometimes even in the form of grants.

However, small businesses of all types and across the country are feeling the economic crunch as they lose their funding from their regular sources. Banks have tightened their belts and removed small business funding sources like lines of credit, as well as stopped doling out personal loans. Even government grants used as a source for small business funding or non-profit funding are evaporating due to budget cuts.

What is a business owner like you to do if you lose small business funding? It may be time to find alternative funding sources or change your business strategy so it fits into new credit standards.

Find Out Why

When you lose your funding, the first thing you should do is talk to your bank or funding source and find out the reason for the cuts. Banks may be willing to talk to their clients about why their loans or lines of credit requirements have changed. Getting this valuable information could help you restructure your business so it fits within new credit standards. For instance, you might need additional partners with exceptional credit scores in order to qualify for lines of credit or loans.

Corporate Funding for Non-Profits

Non-profit small businesses largely depend on grants for their source of small business funding. If government grants dry up, it may be time to approach corporations and ask for sponsorship.

Oftentimes corporations are looking to sponsorship opportunities as a way to both be philanthropic to arts and charitable organizations, as well as earn valuable tax write-offs. Use your corporate network to approach top executives who are interested. Give them a proposal why your organization does valuable work for the community. You could find an angel in the corporate world.

Look to the SBA

Don't forget that the Small Business Administration guarantees loans for small business funding. Talk to your bank, or find one that is an SBA approved lender. Determine if your business meets the requirements for guaranteed small business loans. Eligibility for these loans is usually easier than conventional loans, especially in this economy, and the terms are very reasonable.

Life Insurance

Alternate forms of small business financing may be from your own sources. If you have a whole life insurance policy that has been active for many years, you may be able to borrow against it to use as a small business funding source. Ask your insurance company for details.

Second Mortgage

If you own a home and have equity built up, don't discount a second mortgage to help as a small business funding source. Many entrepreneurs have successfully used this method. However, be sure you are willing to risk your own home to make your small business succeed.

401(k) Financing

Another alternative financing source may be from a 401(k) fund from a previous employer. It is possible to roll over your 401(k) funds into a self-guided Roth IRA. Then use the funds to "purchase" stock in a new private corporation you form, which will then be the source of funds for your small business. However, this method has many IRS obstacles and you should trust the expertise of a financial or retirement expert.

Losing your small business funding doesn't have to mean the end. Keep your options open. Be creative. You can find out why rules have changed and get the alternative sources of funds you need to keep your business thriving.