To fuel your small business dreams and grow it into the empire you dream of, you need capital – sometimes just a little but others, well, others need a lot more. For most of us though, that capital requires finding other sources, especially since that money tree you have been watering in the backyard has yet to grow.
The economy will only expand when we start supporting small businesses. They have become the backbone of our nation’s economy, plus the emergence of new technology have resulted in the return of traditional funding sources and the development of alternative funding sources and platforms.
This comprehensive guide to help you get funding for your small business covers both the traditional and alternative sources now available.
Traditional Funding Sources
While traditional funding sources dried up like the Central Valley of California in the midst of the recent drought, there are some signs that the straightforward funding sources are starting to fill up their wells again and hand out buckets.
Here are some to consider:
Venture Capital: True, this would have at once time been considered non-traditional but it is actually commonplace in today’s startup environment. Even the perception of venture capitalists has changed, no longer being viewed as predatory. Now, they are viewed as mentors, partners, and allies because the new breed of venture capitalists is more open to funding and interested in building the next big thing. While they want to avoid risk, there is more interest in small businesses because of the recent surge of lucrative opportunities. For them to be interested in your business, you need to show a sustainable business model, a product or service that can disrupt the marketplace, and some signs of revenue or customer base. They also want to know what type of return they will get and when they will get it. Two online sources include VC Gate and MyCapital.
Angel Investors: Also once viewed as alternative, it has been angel investors in the past few years that have taken a chance on some of the biggest brands known today. These can either be smaller investors that do what is called “private placement” or there can be a group of wealthy investors that pool their money together to build out a small business into a large company. Similar to venture capitalists, angels want to see that you have specific details about the proven opportunity and the response to any potential risk. Angels want a return and often a piece of you’re your business. Two options for researching and locating an angel include AngelList and Gust.
The Small Business Administration (SBA): As part of the recent administration’s push towards small business expansion, there have been many more SBA loan programs created to help with capital to add locations or manufacturing capability. Typically, your local bank, which is a certified lender for the SBA, is the go-to source for applying for these loans, but the SBA is also starting to catch up with technology by providing more of an interactive online experience with applying for their lending programs.
Commercial Banks: Banks are back to looking at small businesses but still don’t feel as cozy about startups. They want to see a healthy bottom line that tells them there is little to no risk in lending money to you. When they do lend to businesses, these loans have very stringent requirements, including putting up collateral (inventory, accounts receivable, physical assets, etc.) that they can collect on should you default, and come with monthly payments and interest. These loans can often be in the form of a home equity loan or equity loan of credit where you are actually putting your house up as collateral to get that funding to expand your existing small business.
Credit Cards: When used prudently, business credit cards offer an excellent funding source for revolving credit that can help cover the costs of equipment, materials, and other needs, providing that extra thirty days to pay for these while you wait for the cash flow to come in to cover it. When you consider using credit cards for your small business, compared credit cards on costs, fees, Annual Percentage Rate (APR), credit limit, perks and rewards. Some places to consider comparisons include NerdWallet’s list of business credit cards and the reviews at com.
Alternative Funding Methods
When the traditional methods of financing all but disappeared, creativity set in and a number of alternative funding methods were developed. As they caught on and were recognized as reputable and “lifesavers,” more methods were dreamed up like these:
A/R Financing: Established small businesses can use their accounts receivables as the basis to borrow funds to help stimulate cash flow when growing pains get in the way. This often becomes a solution when you have those outstanding invoices were you are waiting 60 days or so for that large payment but could really use some of it now. While there is interest and fees attached to this type of temporary financing solution, it can help your business navigate those gaps in cash flow.
Factoring: Similar to A/R financing, factoring involves factors that purchase those outstanding invoices and you get a percentage of the total amount owed. While the factor now takes on the risk and you get the money, you end up with considerably less.
Incubators and Accelerators: These organizations are primarily interested in those early stage businesses (a.k.a., startups) but are there to help all that they share an interest in because they see the growth potential. Not only do they offer funds, but they also can give you office and manufacturing space, mentoring, network contacts, and education and experience to increase the likelihood of that growth. A good place is the National Business Incubation Association (NBIA), which has a directory of incubators and links to their websites where you can learn more about what each one invests in, including area of expertise and level of involvement.
Family & Friends: Another smaller-sized funding opportunity can be friends and family that are already on your cheer leading squad and are excited about investing in your business because they have faith in you. That fervent belief in your success is great and can lead to a great source to borrow some funds to expand your business. Just know because they are close to you, if the business doesn’t do well and their money is lost in the process, every family dinner or holiday going forward is going to be, well, awkward at best. If you go this route, put it in writing to keep it as separate from your personal life as possible and make sure your loved ones truly understand the risk.
Microloans: Nonprofit organizations, such as Kiva, are putting their faith – and wallets – in small businesses with microloans as small as $25. This allows you to borrow as little as you need for your small business and enjoy a much lower interest rate with manageable repayment terms. Since larger organizations often do not feel like it is worth their while to offer small loans, these organizations help to fill that void.
Small Business Lending Fund: Backed by the U.S. Treasury Department, this fund was established as part of the Small Business Jobs Act of 2010 to provide more funding opportunities to assist small businesses with their capital needs. The website offers information on the financial institutions that are partnering in this fund to provide you with the funding you need to add equipment and manufacturing capability.
Small Business Grants: The benefits of grants is the money is granted to you and no one is going to ask for it back. It is free money, but you need to prove that you can do something meaningful with it. There are all types of national, state, and local grants available for small business expansion and research as well as corporate grants, such as those offered by Chase Bank and FedEx.
Online Sources of Credit and Lending: Everything from loan marketplaces and online portals for loans to peer-to-peer lending now offer new ways to tap capital for your small business. The benefits of such funding sources is access to multiple lenders that can compete for your loan business, which means better terms and interest rates as well as a better chance at getting the type and amount of funding to grow your business. These platforms also offer all types of loans, including traditional loans, equipment loans, capital loans and lines of credit. Some places to consider include Kabbage, OnDeck, PayPal, and Lending Club.
Crowdfunding: One of the most popular alternative funding sources, crowdfunding provides a way to get a crowd of people to give as little to an overall pot of money that can help you with any aspect of your small business, including launching a product or getting the capital to expand your operations. In return, the crowd feels like they are participating in your company and its success plus you give them some other type of takeaway item, depending on their pledge level. Some crowdfunding sites include Indiegogo, Kickstarter, Fundly and Fundable. Each have a specific focus and varying requirements related to end dates and whether you can collect any funding if your pledge amount has not been met (Rockethub).
Bootstrapping: While it may seem strange to put bootstrapping under alternative funding, it has become a lesser-used funding strategy compared to the days of old. Essentially, this source is on you to do whatever you can to personally raise your own funds, including using your own hard-earned savings (or trust fund, inheritance, or lottery winnings, if you should be so lucky) or other available assets. While this “betting the farm” strategy can be risky for you because if it doesn’t work out, everything is gone. However, if it does, you have that and more. You can also bootstrap your business by pre-selling services or products and then using those prepayments as cash flow to increase your service capability or manufacture those products in a larger quantity. A third way to bootstrap is to use other income to fuel your small business, including holding down that “day job” or getting creative, such as renting out a room or vacation property through a service like Airbnb or selling items on a service like eBay or Etsy.
Whatever funding sources you end up with for your small business, remember these words of capital wisdom:
Don’t just take the money to have the money. Consider the source and make sure that it is reputable and has reasonable expectations about payment or the return on that investment. Also, if you don’t really need that big of an amount, just take what you need.
Put everything in writing when you are taking someone else’s money. This can keep relationships in tact plus it can protect you and the person or entity that is lending the money to your small business. If you have to involve others, including arbitration or the courts, this written agreement is there to help.
Don’t start physically spending the money before you actually have the funding in your pocket (bank account). There have been times when funding has fallen through so keep that “how you plan to spend” in your head until you get the green light. Thomas Jefferson gave us that sound advice.
Put the friends and family option down at the very bottom of your list. No business is worth losing someone over a disagreement about money or unfortunate circumstances where that money is not recoverable.
Create a well-conceived strategy and business plan that outlines what makes you different, provides competitive analysis, shows how you solve the pain points in your business segment, delivers evidence of sustainable revenue and growth potential, and examples of the talent and experience on your team.
Always budget so money goes farther and does more – allowing you to minimize future funding searches.
Now it’s time to capitalize on this advice and fund that dream into real success.
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