There was a time when borrowing money to start a business meant one thing: a bank and its often byzantine and bureaucratic approval process. But markets change, as does technology, and early stage companies seeking capital no longer have to turn to skeptical and onerous loan committees to get the funding they need to get their business off the ground. After all, 80% of all small businesses who apply for a traditional loan get rejected, making it an unreliable source of funding.
There are a whole range of non-traditional funding options for entrepreneurs, all of which offer the opportunity for capital infusion when a small business loan from a bank is not a viable source of funding. Which one is right for your young company depends on several factors, including how far along your business is and how much control and equity interest you are prepared to part with.
Here are five alternative funding sources for start-ups that entrepreneurs should consider as they seek capital for their young business:
Venture Capital
VC’s – companies which manage and invest other investors’ funds – could be considered the most traditional of non-traditional funding sources, providing early billions of dollars in investment over the past few decades for young businesses which have the requisite maturity. VCs usually are not interested in early-stage and unproven companies. Rather, they look for more mature businesses that may require larger amounts of capital to bring them to market. In return for their investment, they will likely want an equity stake and perhaps a seat on the board. VCs want to see positive cash flow, large growth potential, a sound business plan, and proven ideas and strategy that have already seen some success in the marketplace.
Angel Investors
Angels are high-net worth individuals (usually with a net worth of well over $1,000,000) who are investing their own money. Angels may invest in seed rounds for companies that need relatively modest amounts of cash to launch but which also present more risk than more mature companies. Angels may decide to jump in simply based on the strength of the idea, their confidence in company management, or other more speculative metrics. They may want a seat on the board or a role in management, but they also may play an active role in other ways, such as bringing contacts, resources, or their own skills to the company.
Crowdfunding
Online platforms such as Kickstarter, Indiegogo, and Gofundme stopped being a novelty years ago and now are seen as viable and attractive business funding options for start-ups. Entrepreneurs solicit funds from a group of individuals through an online campaign. In exchange, investors expect to be rewarded either with gifts, such as products, services, or experiences (“rewards crowdfunding”) or an equity interest in the company (“equity crowdfunding”).
Peer-to-Peer Lending
A cousin of sorts to crowdfunding, peer-to-peer (P2P) lenders don’t fund loans directly but instead act as an intermediary between the borrower and individual or institutional investors such as a hedge fund or investment bank. Payments are usually based on a percentage of monthly revenues. Popular P2P platforms include Funding Circle, Lending Club, StreetShares, and Chicago-based Bolstr.
SBA Loans
In addition to its flagship 7(a) Loan Program, the Small Business Administration also has a microloan program which can provide qualifying small businesses with up to $50,000 to help small businesses start up and expand. The average microloan is about $13,000.
Accessing funds to start your own business has always been a challenge, and you certainly need to have your ducks in a row before you seek capital, whether it is from a dubious loan officer or faceless individuals online. But with more investment options than ever for start-ups, the odds are good that you can get the resources you need to get you where you want to go.