Financing is an important part of small business management – it determines your ability to transform your idea into a tangible entity. After you have gotten your business up and running, you’ll still need to access financing to pursue growth and expansion opportunities. In some instances, short-term financing can help your business stay afloat when you run into the inevitable cash flow issue and its attendant cash crunch.
However, unless you have deep pockets from a previous career, have incredible bootstrapping skills, or access to rich parents or friends, you’ll most likely need a loan at some point to get your business running. Unfortunately, traditional banks often have designed their loan approval process to frustrate all but the most determined business owner. If you are tired of the unsupportive culture of traditional lenders, here is information on four sources of alternative funding for your business.
Online lenders have woven themselves into the fabric of the small business financing industry as a preferred alternative to traditional banks. Economists predict that the online lending industry will grow to $150 billion (conservatively) or $490 billion (aggressively) by 2020. Many small business owners will love the ease of loan application with online lenders, which is usually about an hour’s worth of work. In addition, online lenders don’t waste time before letting you know the outcome of your application; hence, you won’t have to endure a long agonizing wait.
However, there are possibly hundreds of online lenders, and not all of them offer financing options that might be suited to your specific business needs. You’ll need to take the time to conduct your due diligence so that you can be sure that the financing will make and not mar your business. For instance, some lending club reviews from independent platforms suggest that your business should be booking revenue of at least $50,000 per year for you to be eligible for a loan.
If you are building a startup with potential for incredibly fast growth in a high-risk high-reward industry, venture capitalists will be interested in talking to you. Venture capital is simply a source of financing provided for potential high-growth businesses. Banks typically won’t lend money to startups or businesses in any industry considered high-risk. Venture capitalists, however, are willing to take such risks and they will also provide you with access to a vibrant network where you can cull insight to increase the odds of your success.
When you do get money from venture capitalists, you’ll be required to sign a term sheet that gives the VC firm some equity in your businesses. You also need to be aware that venture capitalists are only in it for the money; hence, they won’t think twice about selling out in order to recover their investment when they find a good deal.
Angel investors are practically the same as venture capitalists. Angel investors will also provide funding to businesses that have the potential to deliver incredible ROI. The funding from angel investors is also in exchange for equity, which can be as much as 20%. However, while venture capitalists are companies or a consortium of companies, angel investors are usually individuals who are investing their personal funds into your business.
However, when collecting funding from an angel investor, you need to know if they’ll prefer to be “hands-on” or “hands-off” so that you can avoid conflicts of interests down the road. A hands-on investor will be interested in knowing everything going on in the business and in having a say on important business decisions. A hands-off investor will leave you to do your thing, and you might have a forlorn sense of abandonment when it appears that you are doing all the hard work.
If you don’t mind pooling investments from a number of small investors, crowdfunding platforms such as Indiegogo and Kickstarter can provide you with access to funding. Putting out your idea, pitch, and demo or working prototype on a crowdfunding platform can help you sell your visions to a large number of potential backers who will be committed to the success of your business. The best part is that investors on crowdfunding platforms rarely ask for equity, and they’ll be glad to have access to a founder’s edition or the rights to buy your products at a discount.
However, you need to read the fine print very well so that you can know if the crowdfunding platform uses an all-or-nothing model. You also need to know how much of the money you raise will go to the crowdfunding platform as payment processing fees.