For Young Entrepreneurs, Alternative Funding May Be the Answer
For many new business owners, traditional funding may be out of reach. Fortunately there are many new alternative funding sources available.
You’re an entrepreneur looking for a business loan. This should be easy, right? You’re listening to podcasts telling you that any concept can be transformed into the next winning idea. Maybe it’s your new product, or your dream of owning a franchise. You have your idea, your business plan; you have your drive, your passion, your hustle!
And then there’s money.
First, Prepare Your Personal Finances
You are your business: That means financially, your business life and personal life are connected. So ideally before you start looking to secure working capital for your business, you need to have your personal finance ducks in a row. Your first step may need to be to build your personal credit. If you haven’t already, pay off debt, pay your bills on time, and maintain low credit card balances.
Realistically, you need at least one year’s worth of rent and overhead to keep your business afloat. The Small Business Association estimates that while 70% of new businesses survive the first year, 30% of them fail. And looking out five years chances of survival are about 50/50. These statistics may seem dismal, but in reality, many businesses fail because they didn’t start with enough money to get their business going in the first place!
Where to Look for a Business Loan – That Isn’t the Bank
Traditionally, anyone starting up a business would look toward banks for a conventional business loan. While this is a valid option, most entrepreneurs find it notoriously difficult to get bank financing – especially if they don’t have collateral and/or strong personal credit. Banks focus on the least risky investments – which are not brand new businesses. But the good news is, banks and conventional business loans are not your only option anymore.
- Personal investment, or bootstrapping. Many entrepreneurs opt to finance their company using their own resources such as home equity, personal savings, 401(k), credit cards, or even the operating revenue of the new company.This approach has definite pros and cons. The clear pro is that if you have saved up the money, you won’t owe anyone. And, no investors mean you have complete autonomy in running your business. This allows you to take calculated risks that might not be an option if you have to answer to investors.
The clear downside is that using your own money means you run the risk of wiping out your savings or personal credit. You must also be diligent with your budget and constantly focus on generating revenue to finance your business. If you have a solid plan and the drive to stay on task financially, then using your own resources in the beginning may be the best strategy. There are alternative funding sources outside of using your personal savings.
- Friends and family. Thinking about asking friends or family if they would be interested in investing in your idea? You’ll have to give them a good, solid business plan. And, if your plan includes paying them back, you’ll need to lay out clear and concise repayment terms. Remember: The Bank of Mom & Dad is still a lender. It is essential to treat them with the same respect as any investor or funding source.
- Angel investing. Angel investors come in all shapes and sizes, and are sometimes a primary source of funding for many startups. What they have in common is that they are all individual investors with money they want to invest in your business. Typically angels will invest anywhere from $25,000 – $100,000. In addition to funding, they also provide advice and introductions to networks that will benefit entrepreneurs – they want your company to succeed!
- Venture capital. Venture capitalists (VCs) are investors who finance startups that have great potential for a high rate of return. They assume part ownership in the company in exchange for capital. These investors may be individuals or other financial institutions. VCs tend to invest at the early stage, when your business is showing promise. Once they’ve seen you succeed with one small business, they are more likely to invest in you again. Since VCs want to see healthy profits, they will often add value to your business through non-financial means. This may include advantages such as access to their advisors and other resources.
- Government grants and subsidies. This is considered the “holy grail” of alternative funding. You don’t have to pay these back. Getting one of these grants could give your business a healthy dose of free money. The trick is finding one that suits your company. Once you’ve confirmed that your company fits the requirements, you fill out an application. These grants are often quite competitive – you will go up against other companies trying for that same money. There are both federal grants and corporate grants for you to consider.
- Crowdfunding. In the past few years, numerous small businesses have gotten their starts raising money online via social media and dedicated crowdfunding platforms like Kickstarter and Indiegogo. You use these networks to reach out to friends, family, and individual investors. This type of fundraising campaign gives your network the opportunity to help grow your business with an amount that works for them.There are 3 basic types of crowdfunding platforms: donation based, reward based, and equity based. Donation based platforms are exactly what they sound like – donors are giving a donation without looking for anything in return. These tend to be smaller donations. Reward based platforms offer backers some type of swag or experience in return for their contributions. This reward is often what is being produced, maybe a product sample or a video. Equity based platforms give investors equity in the company, usually in exchange for larger amounts of money.
As with all contracts, read the fine print. Every crowdfunding platform has different requirements. Some have payment processing fees or per transaction charges. Some platforms are “all or nothing,” meaning that if you don’t reach your goal, you don’t get any funding.
Looking beyond conventional business loans – and including conventional business loans – you have an array of funding choices available to your business. Financing comes in many forms. Find the best one for you.