By: vnadal
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Small Business Finance Options You Didn’t Know About

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Do you qualify for a
small business loan?

Didn’t get the small business loan you applied for? Don’t want to mess with you retirement income and liquidate your pension or 401K? Are seeming financial setbacks causing you to become increasingly frustrated in your mission to get your start-up operating smoothly and effectively? While perfectly normal (and, common as it’s much harder to obtain a small business loan in the years since 2008), this anxiety is also unnecessary as there are plenty of small business finance options you didn’t know about! Certainly, there are those investment schemes that seem too good to be true and anytime you are researching potential funders, it’s always wise to keep your wits about you. However, by no means does that mean that you need to dismiss non-traditional finance options. Chances are, you want to combine your business savvy with creativity and why should that not include some outside the box thinking when it comes to financing your dreams? Now that we have convinced you that you need not be discouraged, what are some of these other options you should consider?

Every Time a Bell Rings, an Angel Gets Its Wings

Unless you truly never use the internet (and, if you are reading this article, you clearly do) or you have never been tempted to buy peanut butter in bulk, you have surely heard of both Google and Costco. Before these two giants in their fields became such, they were start-ups. Who were their earliest backers? Angel Investors. An angel investor is a person or entity that invests in the early stages of a company with the expectation of a 20 to 25 percent return on their investment. A benefit to this type of funder is that you are likely to have an investor with the experience and expertise to provide thoughtful guidance as your company moves forward.  The top 3 reasons an angel investor will invest in your company are:

  • Management Team: A smart angel investor knows that even more important than the product or the marketing are the people behind those ideas; a team with the experience to sell the vision of the company.
  • Ability to Understand the Technology: particularly for tech start-ups, angel investors want to make sure they fully understand what it is they are putting their money into. That is not to say that you shouldn’t be launching a great new high tech company, but it does tie into the Management Team component in that it’s important to have people who are well-versed enough to be able to explain even complex technological jargon to anyone.
  • Potential Return on Investment (ROI): this one is pretty obvious, right? However, while earning potential is a strong motivator, it’s not necessarily the only thing at which angel investors are looking. In fact, many have stated that having a positive impact matters, especially if funding a company that is in some way committed to issues of social justice or health. So, if this a route that you think it right for you, don’t be afraid to appeal to the altruistic side of potential investors.

This is a Capitalist Society, After All

 If you have ever seen the movie, “Wedding Crashers” you may have been left wondering what exactly Vince Vaughn and Owen Wilson meant when they said they were Venture Capitalists. Much as investing in stocks that are poised to offer high gains, they are also high risk; those are the kinds of businesses in which venture capitalists invest. They also tend to be very industry-specific, and therefore, much like angel investors, are usually able to offer a great deal of insight or guidance to those companies in which they are investing. Additionally, given the current social and political climate, more and more venture capitalists are interested in investing in socially conscious business endeavors. Much like with angel investors, this can be a good option for those companies that are still so new that are considered too risky to obtain funding from more traditional means. Something to keep in mind, though: unlike a bank loan, online loan or most angel investors, where the entrepreneur is only expected to pay back the amount of the loan plus interest, many venture capital investments come with the expectation of ownership shares, thus ensuring that the investor has a say in the future and direction of the company. As such, if you’re really just looking for someone to write you a check and perhaps offer some advice when asked, this may not be the best option for you.

Show Me the Money

Factoring/invoice advances is another clever way to get your business up and running even without a traditional loan. Through this method, a service provider will float you the money up-front on invoices that have been issued. Once those customers pay you back, you then pay back the initial provider. This can allow you to have a faster turnaround in accepting new projects, as you are closing that pay gap that so many new companies struggle with.

This may all sounds rather complicated, but it doesn’t need to be as there are three key questions to ask yourself:

  1. What type of factoring does my business need?
  2. What amount of the outstanding invoices need to be funded and by when is the money needed?
  3. How much am I willing to pay?

Obviously, it’s not quite as simple and giving your invoices to a factoring service and having them deposit a lump sum into your business account. (Although, the turnaround can be as quick as 24 hours.) The service will conduct their due diligence to determine that your customers will be able to pay their invoices in a timely fashion. The customer then pays the factoring service, who then in turn provides you with those funds, minus their fee, which generally ranges between 2-6 percent of the total invoice.

Not Just for Giving Tuesday

Again, if you spend any time at all online, you are probably aware by now of a popular trend known as Crowdfunding. If you are not willing to hand over control or ownership stocks, if you are concerned by the interest rate charged on many loans, crowdfunding can be an interesting choice for start-up or small business. Rather than turning to one or two large investors, this gives you the opportunity to obtain funding from a much larger pool of funders. However, the amount that each person is investing is going to be considerably smaller than what one would receive from an angel investor or venture capitalist. Even so, this path is continuing to grow in popularity, with some financial experts predicting that it will even surpass venture capital as a means of investing in new business.

While an exciting way to go, every platform is different, so much as any of your investors will be doing their due diligence, make sure you do your own. Different crowdfunding platforms have different policies, whether it be the fees they charge or the amount you have to raise to be able to keep any or all of the funds raised.

Grant Me the Serenity

When most people hear the word, “grant” they associate it with funding for nonprofit organizations or a means of paying for college. But, don’t forget that there are any number of small business grants that are available to entrepreneurs who are willing to do a bit of research. And, the beauty is that a grant, unlike so many other funding options, do not have to be repaid. Companies that focus on science or research are the ones that are most eligible for grant funding, however, there are an increasing number of small business grants that are available to women, immigrants and people of color.

With that said, if you thought getting a bank loan was difficult, you will probably not find obtaining a grant to be any easier. This will prove to be yet another area in which you will do best to seek some outside help from a finance professional, as there are a variety of places to look for grants. Additionally, getting guidance from someone with writing such proposals can be beneficial, as a seasoned professional will better understand the lingo used in the Request for Proposals.

Ultimately, don’t be discouraged if you don’t think you are having a lot of luck using more traditional methods. Many of these options that you may not have known about are becoming the traditional ways to go. And, besides, thinking outside the box is probably what is giving you the drive to start your own business!

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