All new and young businesses need money to grow but not all have venture capital backing. Liz Long explains 6 other ways to get the financing you need.
There’s one thing all new and young businesses have in common: they need money to grow. But not every entrepreneur is lucky enough to win the eye of a venture capital firm or the heart of an angel investor — or even qualify for a standard bank loan. So what should they do? There are a variety of ‘non-traditional’ methods of raising capital available to entrepreneurs, including options for those with no business history or below average credit. While this list is not exhaustive, it should shine a light on the many different ways to find money!
Friends and Family Financing
How it works: Friends and family provide short or long-term loans OR capital contributions (giving them ownership in the business).
Who it’s good for: Start-ups with no track record, individuals with poor or no credit.
Insider Tip: When deciding between taking loans or giving up equity in the business use this rule of thumb: if you plan to generate profits within the first 12 months, take a loan. If you plan to scale and eventually sell your business, but will spend several years investing heavily in growth (thus tying up profits), opt for a capital contribution.
How it works: Mission-driven lending organizations give micro-loans (between $500 and $50,000) to businesses not eligible for traditional bank funding.
Who it’s good for: People with a credit score above 550, those who have been in businesses longer than 2 years.
Insider Tip: In the 6 months prior to applying for a micro-loan, make sure all revenue generated by the business is deposited into a business bank account. Micro financiers make their lending decisions based on income vs. expenses, so cash sales or funds deposited into a personal account will not be viewed as business revenue.
How it works: Entrepreneurs use crowdfunding platforms to raise smaller sums of money from a large number of people, often in exchange for rewards and incentives related to the business.
Who it’s good for: Unique or inspiring businesses, individuals with poor or no credit, those who don’t want to take on debt/give up equity.
Insider Tip: Allow 3-4 months to properly prepare your crowdfunding campaign. This involves developing the campaign content as well as a thorough marketing and PR plan.
How it works: Peer-to-Peer lending sites connect investors and borrowers, enabling an exchange of funds that gives the lender a competitive rate of return and the borrower quick, simple access to funds.
Who it’s good for: People with a credit score above 640, those not interested in sharing business finances or how they will use the funds (neither of these are required).
Insider Tip: Interest rates are dependent on several factors including credit score, loan amount, and loan term.
How it works: Factoring companies give money to businesses based on their incoming receivables. For example, if a business has $10,000 in Accounts Receivable invoices due in the next 60 days, a Factorer will advance a percentage of this amount to the business, and then collect the funds directly from the business’s customers once the invoices are due.
Who it’s good for: Businesses with credit-worthy customers (Factorers evaluate the credit of a business’s clients and customers, not the business itself), those with short-term cash flow challenges.
Insider Tip: Don’t want to deal with a Factoring company? Ask friends or family to finance your receivables. The repayment period is quick and you can negotiate a mutually agreeable interest rate.
How it works: Businesses are invited to work in the Incubator’s shared workspace and receive either seed capital in exchange for a portion of ownership or proceeds, or are provided with regular opportunities to meet investors and mentors. Other benefits include shared rent, reduced business services, and a built-in peer community.
Who it’s good for: Start-ups with high growth potential, those who can generate a formal investment pitch including financial projections.