Raising capital from non-traditional sources can be a good way to get the money you need to grow your business. There are a number of different sources available today, and this article provides a brief summary of the most common ones along with things you need to consider before pursuing them.
Capital Raising from Non-Traditional Sources is a One-Time Event
Common to all non-traditional sources, capital raising from non-traditional sources is a one-time event, meaning that you will be unable to go back to the source for additional capital should you need it. This varies widely with traditional sources like commercial banks and venture capital where the closing of financing is the beginning of a partnership that can involve several financing transactions.
Let’s start with friends and family and angel investors which are the sources of debt and equity that have been around the longest. Here are the key issues with these sources.
- When the economy turns down, non-traditional investors will head to the sidelines and will not be available for any needed additional capital.
- When you get to the point where institutional capital is needed, those sources will see individual investor ownership as a negative. They worry that down the road an individual investor may behave in a way that restricts value creation or liquidity realization.
- If you raise money from friends and family, think about what your relationship with them will be if you lose their money. I know you think you cannot fail (that is why you are an entrepreneur), but it is a sad fact that 90% of companies go bust within a few years of founding.
So if raising capital from these non-traditional sources is not an imperative, it may be best to wait until you can do an institutional round.
Here are some sources of non-traditional financing that are relatively new on the scene.
Peer-to-Peer Lending
People seeking money connect with individuals willing to lend it to them using peer-to-peer financing. There are no banks or lending institutions involved; instead, a third party acts as an intermediary. There are websites like Prosper and Lending Club designed for this purpose.
The process of p2p lending involves these steps:
- You visit a peer-to-peer lending site and describe the size of your small business loan and its purpose.
- The middleman examines your credit and informs potential lenders about your status.
- Multiple lenders compete to lend you money for whatever amount they’re willing to put up.
- The intermediary combines all of the loans in one package at the group’s lowest rate.
You receive the cash you require, and your lenders earn interest on the money they invested in your company.
Crowdfunding
Crowdfunding is a way of raising money by asking a large number of people for small amounts of money. Kickstarter and Indiegogo are two of the many platforms out there. Here are the steps in using this financing channel.
- To start a campaign, you create a project on the crowdfunding website and set a funding goal.
- If people like your project, they can pledge money to it.
- If you reach your funding goal, the money is transferred to you, and you can use it to finance your business.
- If you don’t reach your goal, the money is returned to the backers.
Chief among its drawbacks is that campaigns can take a lot of time and effort to run successfully, and most companies that start on this path never get funded.
Microloans
Microloans are small loans, typically between $500 and $35,000. They are often used to finance the start-up or expansion of a business. Kiva and Accion are two of the many microlenders out there. Here are the steps in the process.
- You fill out an application on the lender’s website.
- The lender then reviews your application and decides whether or not to approve the loan.
- If approved, the money is transferred to you, and you can use it to finance your business.
The chief drawback of microloans is that they have high-interest rates and fees.
Internet-based Lending
Banks may take a week or two to make a loan decision, but online lending platforms like IOU Financial and On Deck can do so in as little as one business day. It’s all done electronically:
- You submit your loan application online on their website.
- They utilize the internet to gather data for a lending decision, such as your company’s cash flow and credit history. Depending on your credit score, results are generally available in a matter of minutes.
- The loan is deposited electronically into your bank account as soon as the next business day after approval.
- Your loan is repaid by automatic bank transfers from your account daily.
Business Invoice Factoring
Invoice factoring is a type of financing that allows you to sell your unpaid invoices to a third party at a discount.
The third party pays you the total value of your accounts receivable minus a fee and then collects payment from your customer.
Invoice factoring can be a rapid way to get capital, but it is expensive as factoring entities charge between 5 and 10% of the value of invoices.
Other Alternatives
Other sources of small business capital not mentioned previously include:
- A home equity line of credit or second mortgage on your house
- A loan against your 401(k) retirement plan or permanent life insurance policy (such as whole life or variable life policies)
- A Small Business Administration (SBA) loan
- A state or local economic development grant
- A business credit card
Of course, each has its pros and cons that you’ll need to consider before taking on any additional debt. Other than grants, each of these sources involves the possibility of a loss of personal property if you cannot repay what was borrowed.
We have just scratched the surface
I am a seasoned expert in helping small businesses get the funding they need to thrive. I can work with you to understand your unique business and financing needs, then help you decide on what source of financing works best for you.
Book an introductory call, and let’s get started on getting your business the funding it needs to succeed.