It is undisputed that in order to start a business, one needs an idea and money. Unfortunately, ideas (even the best ones) do not come with a check attached. This means that business owners need to go out and get the money needed to start the business from somewhere.
Everyone is familiar with the way that most business owners get funding for starting or expanding their business; they go to a bank and asking for a loan. However, this is not an option for all business. Those businesses which are just starting and do not have a credit history of their own, who have poor credit, or who do not have anything to offer in exchange for the loan (no collateral) are often turned away by traditional banks. Thankfully, there are now several options available for the savvy small business owner.
The following seven alternative financing options are available to a wide range of businesses, including businesses which may not qualify for a traditional bank loan and start-ups.
Alternative Financing Options
Community Development Finance Institutions
Community Development Finance Institutions (CDFIs) are non- bank lending institutions which located all across the country and focus on providing capital to small business owners. As all CDFIs follow a similar mission, to encourage small business development and to help existing small businesses thrive and grow, they are often more understand of the struggles faced by small business owners. CDFIs often do not require nearly the amount of collateral that a regular bank would and are often willing to consider other items (other than assets) as collateral.
One can see venture capitalism in action simply by watching a version of the show Shark Tank. In the Show, and with all forms of venture capitalism, the business owner is offered a certain amount of money (funding) in exchange for partial ownership in the business. The percentage of ownership that is required if often negotiable and is based upon a variety of factors, including the amount being offered/requested and the value of the business. The benefit of teaming up with a venture capitalist are not always purely financial; having an experienced venture capitalist on your team can provide you with a new knowledge and industry connections.
While angel investors are similar to venture capitalist and while they work in the same way (funding in exchange for an ownership interest), they tend to look different and look for different companies to partner with. While venture capitalists are usually established companies, angel investors are usually individuals and while VCs normally look for established businesses or businesses that have demonstrable growth, angels are more wiling to invest in start-ups and early stage in businesses. Getting involved with an angel investors often includes many of the same benefits as getting involved with a venture capitalists and often more; angels are often willing to (and do) provide a greater amount of guidance and advice related to growing the business.
With partner financing, a small business teams up with a larger player in the same industry. The larger business provides funding to the smaller business in exchange for certain special treatment or perks, such as special access to new products, access to certain staff members, distribution rights, special pricing, or some combination of the foregoing. Partner financing in some rare cases can even be royalty based; it all depends upon the arrangement agreed upon by the involved parties.
Merchant Cash Advances (Future Sales Financing)
While Merchant Cash Advances (MCAs) are one of the oldest form of alternative funding, and one of the most well-known, they are also one of the most expensive forms. MCAs are basically a cash advance which is then paid back using a set percentage of the business’ daily credit card sales. This method is liked by business owners as the payments that are due change based on the business’ sales and they are easy to calculate. However, the interest rate (APR) charged on this type of alternative financing is often high (sometimes in the triple digits) and the constant payment requirement can significantly affect the business’ cash flow.
Crowdfunding has gained in popularity over the last decade or so due to development of funding platforms, such as Kickstarter and IndieGoGo, that allow business owners to create a crowdfunding campaign quickly and easily. With Crowdfund, a business owner uses contributions from a variety of different individuals, investors, or business to raise the amount of funding needed. Crowdfunding can be done on its own or in addition to any of the other alternative funding options above. While crowdfunding can be considered a more difficult type of funding due to the amount of effort to create, monitor and market the campaign to attract the attention of donors; it is worthwhile considering as it can generate as substantial amount of funding.
Grants are now available for all different types of small businesses and all types of small business owners. Unlike in the past, grants are no longer limited to those businesses which focused on science or research. While the Small Business Administration (SBA) is a great place to start looking for grants, there are several other websites, and even a few organizations, that help small businesses find grants. A quick google search will provide the names of several institutions who are offering grants to small businesses (e.g. www.grants.gov, https://eda.gov/funding-opportunities, etc.).
Locating Alternative Financing
The list of financing options above is not an exhaustive list and several other financing options exist. The following article in this “Money Matters” series discusses a few more alternatives to conventional financing as well as the benefits of non-traditional financing.
Trying to find financing for your business can be time consuming and a bit overwhelming. To avoid wasting time, it important to carefully consider the type of investors or financing source that work for your business before trying to make connections. Spending time talking to the wrong people, while informative, does not get funds into your business’ bank account. Should you have any questions about obtain alternative financing for your business, or would like to schedule a free initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or contact us online.
Navigant Law Group, LLC is a full-service law firm with various areas of service to assist your business, including Employment Law, Intellectual Property, Commercial Real Estate, Litigation, and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, and Guardianship.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.