Didn’t get the small business loan you applied for? Don’t want to mess with your retirement income and liquidate your pension or 401K? Are you increasingly frustrated because your financial setbacks make it impossible to operate your start-up smoothly and effectively? This is perfectly normal, and common, as it’s much harder to obtain a small business loan in the years since 2008. But 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. So, 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: 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 small business finance options you should consider?
Alternative Financial Options for Your Business
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 startups. 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 angel investors is that they have the experience and expertise to provide thoughtful guidance as your company moves forward. The following are the top 3 elements an angel investor is looking for in your company before making an investment:
- Management Team: a smart angel investor knows that even more important than the product or the marketing are the people behind those ideas. Therefore he will look for a team with the experience to sell the vision of the company.
- Ability to Understand the Technology: particularly for tech startups, angel investors want to make sure your company fully understands what they are putting their money into. But don’t worry: this doesn’t mean you have to develop high technology. Going back to the Management Team component, the important thing is to have people who are well-versed enough to be able to explain 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 that angel investors are looking at. In fact, many angel investors have stated that having a positive impact matters: they show the preference for companies that are 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.
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. Venture capitalists invest in the kind of business that offers the possibility of high profit but means also high risk. It’s much like investing in stocks that are poised to offer high gains, but they are also high risk. Venture capitalists also tend to be very industry-specific, and therefore, like angel investors, are usually able to offer a great deal of insight or guidance to your company. Additionally, given the current social and political climate, more and more venture capitalists are interested in investing in socially conscious business endeavors.
Venture capitalists can be a good option for those companies that are still so new that are considered too risky, and they find it hard to obtain funding from 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. This means 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, this may not be the best option for you.
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 sound rather complicated, but it doesn’t need to be if you ask yourself these three key questions:
- What type of factoring does my business need?
- What amount of the outstanding invoices needs to be funded, and by when is the money needed?
- How much am I willing to pay for this service?
Obviously, it’s not quite as simple as 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 factoring service will determine if your customers will be able to pay their invoices in a timely fashion and if so, they will provide you with their services. Then you first pay the factoring service, who provides you with those funds, minus their fee: this generally ranges between 2-6 percent of the total invoice.
Again, if you spend any time at all online, you are probably aware of a popular trend known as “Crowdfunding”. If you are not willing to hand over control or ownership stocks, or if you are concerned about the interest rate charged on many loans, crowdfunding can be an interesting choice for you. 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, and some financial experts predict 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’s the fees they charge or the profits you must generate to sustain their funding.
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 a number of small business grants 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, doesn’t have to be repaid. Companies that focus on science or research are the ones that are most eligible for grant funding. However, there is an increasing number of small business grants available to women, immigrants, and people of color.
With that said, if you thought getting a bank loan was difficult, you will probably find that obtaining a grant is not any easier. This is another area where is best to seek some outside help from a finance professional who provides you with information about the places to look for grants. Additionally, a professional will guide you when writing a proposal; a seasoned professional will better understand the lingo used in the Request for Proposals.
Ultimately, don’t be discouraged if you are not having a lot of luck using more traditional methods. Many of these options that you may not have known about are becoming the common way to go, even if they are non-conventional. And, besides, thinking outside the box is probably what is giving you the drive to start your own business!