Alternative Business Financing Options

Idea + Money = Business

Raising money—or “capital,” in business-speak—is often the first roadblock entrepreneurs run into when starting a business. Even established companies with a track record of success can have trouble securing the right amount of money at the right time.

Business owners typically raise capital from a variety of sources depending on what’s needed and what’s available. Most dip into their savings, borrow money from friends and family, or try to get a bank loan. But where do you go if you’ve tapped into those sources, or need money quickly?

Alternative Lenders

Online lending institutions have become an increasingly popular lending source. Unlike traditional banks, these lenders typically make loans more quickly and look at a wider range of factors when considering your risk level. However, these institutions tend to have extremely high interest rates that could be detrimental to your business and to you personally.

Peer-to-peer lending sites connect people who need money with individuals and institutions looking for a place to invest their money.  As with other lenders, these sites offer the best interest rates to borrowers with high credit scores and a solid business.  Higher-risk borrowers face steep interest rates.

Equity Investors

Equity investors are people or companies who give you money for a share of your business. The advantage is that, if the business fails, you are not responsible for repaying the investment.

The downside is that once you sell shares in your company, you no longer have complete control of how the business is run. Depending on how much say the investors have, you might be forced to take the company in a direction that doesn’t align with your values or your vision.

Equity investors come in different varieties. Family and friends might prefer an equity stake in your business to a loan agreement. Angel investors are serial entrepreneurs looking not so much for the financial return on investment as the emotional high that comes from growing a company. Private equity groups are business entities focused on financial returns; they’ll often shake up a company with new management, budget cuts, and aggressive sales strategies to prime the company for a sale.

Crowdfunding

Crowdfunding refers to a particularly type of investing facilitated by a technology platform and governed by the crowdfunding site’s requirements and/or federal laws.
There are two types of crowd-funding.

Incentive-based platforms like Kickstarter allow people to raise money in exchange for certain incentives, not equity in the business or a monetary return like a dividend. The pool of investors here is limited only to how well a company can market itself to the world.

Equity crowdfunding, on the other hand, involves selling shares of the business venture in exchange for money from investors. In this type of crowdfunding, the pool of investors is limited by net worth. In addition, the process is governed by rules created and enforced by the Securities and Exchange Commission (SEC), the federal agency that oversees traditional equities like stocks and bonds.

Crowdfunding has pros and cons, just like any other fund raising vehicle. Even more important, crowdfunding requires work just like any other fundraising campaign. In addition to a great idea, the process takes persistence, organization, and a solid business plan.

Contests

There are numerous local and national contests that award prize money to businesses in various stages of growth. Some people shy away from entering contests because the work involved might not justify the end result, especially if the award is not large.

However, it’s important to remember that contests bring credibility and exposure as well as prize money. Even if you don’t win, going through the application process is bound to be valuable–motivating you to finish a long-delayed deliverable, forcing you to fine tune your message, or reminding yourself why you’re doing this in the first place.

Check out North Bay Innovation Summit’s annual contest.

Vendor Financing

Say you need to buy equipment or raw materials, but you don’t have the cash up-front to pay for the whole purchase. Often, you can negotiate with the vendor on terms of payment. This is somewhat like getting a loan from your vendors, and it can be a fantastic tool to build commercial credit as well as goodwill among key players in your industry. Of course, the positive vibes only happen when you pay your bills on time….

Product Pre-sales to End-users or Distributors

Getting your customer to pay for a product or service before you’ve delivered it is a smart way to finance your business. You get money in advance yet you don’t pay interest on it. And it’s not as crazy as it sounds:  Think about all the gift cards sitting in your wallet, all the personal training or spa packages that were purchased and never redeemed, and every new product release from Apple Computing, and you know what I mean.

As always, the key to pre-sales is properly managing all the money you get up front so that you can deliver the product or service as promised. Be sure to check with your accountant to properly record the sale and delivery of products, especially if these two actions happen in different tax years.



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