The best product and service in the world can’t save a business when there is no money to run it. While bootstrapping a business certainly has it’s benefits, in many cases it is not feasible and it can sometimes stifle the business’ growth and development.
That said, wading into the world of business finance can be overwhelming, indeed- especially if this is your first experience with it. Where do you go? Who do you ask for money and how? Which forms of business financing are best for you and your business?
To help set you in the right direction I have amassed a list of information and resources on various forms of business finance. Keep in mind that this list is geared towards those who already have an established, operating business and are looking for funds to help them run and/ or expand it.
- Venture Capital and Angel Investment
- Business Bank Loan Resources
- Non-Bank Financial Institutions
- Government Grants
- Loans from Friends and Family
- Peer-to-Peer Lending and Crowdfunding
- Asset-Based Financing
Venture Capital and Angel Investment
Venture capital (VC) is made up of private funds from institutional investors and wealthy individuals looking for a large return on investment. Dedicated investment firms pool together these funds and offer it to young companies with a lot of growth potential in exchange for ownership shares and control over company decisions. VC’s make their return in the event of an Initial Public Offering or the trade sale of these companies.
Angel investment is a form of equity capital derived from wealthy individuals and experienced entrepreneurs looking for a large return on investment. Angel capital is generally offered to nascent companies with the potential for profitability and rapid growth in exchange for ownership shares and influence over company decisions. Angel investors, like venture capitalists, make their return on investment in the event of an Initial Public Offering or the trade sale of the funded companies.
Venture capital and angel investment can be a good source of funding for developing companies with a high growth potential looking to bring in some initial capital. Generally, these businesses are too small or too undeveloped to raise capital in the public markets or secure traditional financing from the bank.
If you are interested in either venture capital or angel investment for you company, first, take a look at this article by Paul Grahm of Y Combinator to get an idea about you’d be getting yourself into, and then you can start your search with these sites:
- Angel Capital Association
- National Venture Capital Association
- Inc. Angel Investor Directory
- Angel Capital Directory
- Go Big Network
Here are some other helpful articles on the topic of venture capital:
Business Bank Loan Resources
If you have stellar personal credit, and your business is not considered to be “high risk,” such as a restaurant or a salon, then you may be able to secure financing directly from a bank. Business bank loans typically carry fixed interest rates, monthly or quarterly repayment schedules, and include a set maturity date. They tend to be classified as either intermediate-term loans, those given for less than three years, and long-term loans that typically are spread out between three and 10 years. Long-term loans are secured by a business’s assets and typically require quarterly or monthly payments.
If, however, your personal credit profile leaves much to be desired and your business is relatively new, then, you can try pledging collateral, offering a personal guarantee, or taking on a business partner with better credit. You could also head to your local community bank for the loan, since they would be more likely to approve you if they know you from the community.
Here are some online resources to check out for business banks loans:
- If you are interested in an SBA backed business loan, be sure to visit the SBA website for more information.
- Look through the informative small business loan articles over at About.com
Non-Bank Financial Institutions
If you are looking for a business loan, but want to avoid a bank, you may have two main options:
Get a loan at a credit union. Credit unions are non-profit cooperatives owned by their members. In order to maintain their non-profit status, these financial institutions have to restrict membership to a particular group of people, such as those attending or working at an educational institution, or residents of a particular community. The tax advantage associated with being a non-profit typically allows credit unions to offer lower interest rates on loans. To get a list of credit unions in your area, go to the website of The National Association of Federal Credit Unions (NAFCU).
Request financing from a local Community Development Financial Institution (CDFI). CDFIs are financial institutions that offer financing and other financial services to economically disadvantaged and under-served communities within the United States. There are several different institutions that can take on this title including: a community development bank, a community development credit union, a community development loan fund, a community development venture capital fund, a micro-enterprise development loan fund, or a community development corporation. CDFIs are certified by the Community Development Financial Institutions Fund (CDFI Fund) at the U.S. Department of the Treasury. To locate a CDFI near you, you can use this CDFI locator.
Have you ever seen those ads claiming that you can get “free money” from the government? If it sounds too good to be true, that’s because it is. Though there are grants available, and perhaps a few of them may even be suitable for a select handful of small businesses, they typically come with many requirements for approval and restrictions on the use of the money. Unless you know for sure that your business fits into a specialized, “grant worthy” category, I wouldn’t spend too much time looking for funding in this area. If you would like to do a search for programs and see if you qualify, then head to the following sites:
- A list of State Development Agencies for small business grants
- The Catalog of Federal Domestic Assistance
There are several microlending options available to small business owners in the US. With microlending, funding is usually provided via community-based, nonprofit microfinance institutions. Though anyone can apply for funding, these programs tend to favor business owners working in rural or disadvantaged communities as well as those struggling with limited money or poor credit. Here is a rundown of the main options:
SBA Microloan Program. Through its microloan program, the Small Business Association (SBA) provides direct funding to designated non-profit intermediary lenders (typically community-based organizations) who then provide microloans to small business owners and entrepreneurs. For a list of participating microlenders by state, seethis document.
Accion USA. Accion USA is one of the largest microlenders in the US. It’s a microfinance community organization that offers small business loans up to $50,000 as well as business consulting to small business owners who are unable to secure traditional financing.
Kiva. Kiva is an international organization dedicated to fighting poverty. It operates a peer-to-peer lending web portal where small business owners and entrepreneurs apply for loans by posting their stories online.
Communities at Work Fund. Global financial services company, Citi, along with the Calvert Foundation, and the Opportunity Finance Network established the Communities at Work Fund in 2010. The program offers loans to Community Development Financial Institution (CDFI) loan funds that finance small businesses in addition to community service organizations in under-served communities. The site also offers resources for small business owners looking for financing via a CDFI.
Microlender search portals:
Loans from Friends and Family
Borrowing money from family and friends can be a quick solution to your financing needs; but that doesn’t mean it’s a painless one. Though it may seem a little awkward to write up a contract for mom and dad or your best friend, it’s one strategy you can take to help ensure that money doesn’t strain your closest relationships. The contract should detail the amount of money being exchanged, the method of repayment as well as the specified repayment period. If your acquaintances will be shareholders in the business, then make sure you consult with an accountant or lawyer regarding how to set that up.
There are several sites that can serve as an intermediary to make the loan between you and any of your friends and family more official and binding. Each of these services come with various features, but they all offer some form of legal paperwork, payment processing, and loan status information. Here are four sites to check out:
Peer-to-Peer Lending and Crowdfunding
Peer-to-peer, or P2P lending is a form of financing that occurs directly between individuals or “peers” without the involvement of a traditional financial institution. Loan amounts are typically small. The two biggest P2P lenders, Lending Club and Prosper.com, offer a maximum of $35,000 and $25,000 respectively. Loan terms are also pretty short, from 1 to 5 years.
With the crowd funding model, business owners can raise the funds they need by requesting a small amount of money from many different people online. Unlike more traditional forms of business finance, the money raised through crowd funding is not directly repaid. Recipients may instead offer their investors some specified item or service in return for their financial support, such as a free sample of their product.
Here is a list of some top crowdfunding sites:
Kickstarter one of the most well-known crowdfunding sites
Venture Socially. Offers several tools and features to help pitch your project to the masses.
33needs. Provides crowdfunding for social entrepreneurs, social enterprises and businesses with a social mission.
MicroVentures. Targets businesses that are creating technologies, products and services in areas, such as business products, consumer products, electronics, and online technology.
Quirky. Offers product designers and inventors the chance to bring their products to market.
FansNextdoor. FansNextdoor is a platform for all creative professionals to promote and fund their projects together with their fans.
Indiegogo. Submit any kind of project: creative, social, or entrepreneurial, and get the tools and platform you need to raise funds.
Growvc A global marketplace for startup funding.
Rocket Hub. RocketHub is a community for “creatives and fuelers.”
Peerbackers. Peerbackers is for business owners to raise capital from their peers
If your business is relatively new, and the above options are not feasible, then you may want to consider funding via an asset-based financing arrangement. Though, this option may be a bit more costly, applying for, using, and paying back the funds received is much easier. But keep in mind that you need to research potential lenders to make sure they have a good reputation and offer competitive terms. Don’t just pick the top options in a Google search.
Here is a rundown of the top asset-based financing options for small businesses:
Factoring or Financing Accounts Receivables. If your business deals with customer invoicing, then you may be able to leverage your outstanding customer Accounts Receivables (AR) in exchange for instant financing. With AR factoring, your business would receive 70-90% of the total value of the outstanding receivable up front, the rate is generally dependent on the age of the account. The factor company would then assume responsibility for collecting the outstanding invoice. Upon full receipt of the payment from the customer, the factor company will return the remaining balance, minus a small processing fee. With AR financing, your business would use its outstanding invoices as collateral for financing, but you would still be responsible for collecting payment from your customers.
Business Cash Advances. A business cash advance (also known as a merchant cash advance) is based on future credit card sales. In this set up, the cash advance provider purchases some of a business’ future credit card receipts at a discount, which generally ranges between 20%-30% of the amount funded. Cash advance companies usually require that a company be in operation between 3 and 6 months, and may also require a minimum sales volume. In exchange, the business receives a predetermined amount of instant cash which can be used as working capital. The cash advance company then collects a set daily percentage of future credit card sales until the full amount funded has been paid off.
Revenue Based Financing. Revenue-based financing allows borrowers to get up front funding, usually in the form of a cash advance, and then pay off the amount funded via a monthly allocation of the revenue their business generates. But, unlike the cash advance, a business’ whole revenue stream is considered. While interest rates are again on the higher side, this finance product allows business owners to maintain ownership of their companies while not being forced to borrow against their homes and possessions.
Purchase Order Financing. Also called inventory financing or PO funding, purchase order financing is a short-term, commercial finance option that provides capital to pay suppliers upfront for products or inventory so the borrowing company doesn’t have to deplete its available working capital. The products or inventory then serve as collateral for the loan if the business does not sell its products or otherwise cannot repay the obligation.
Lease-Back Programs. Also known as a “sale and leaseback,” lease-back programs allow the owner of a property or other valuable asset, such as equipment or vehicles, to “sell” it to a lender and then lease it back during a set period of time. Under this arrangement, the original property owner can quickly free up working capital while retaining possession and use of the property.
Asset-Based Financing Online Resources:
ABF Journal– a publication about asset-based financing
Thanks for posting a comprehensive and informative article. Your elaboration on the terminology and sites needed helped me to headstart my business. Thanks!
Thanks for this information
One thing when it comes to starting a business is to never get a loan. Giving up part of your company for guidance is better than having money from people who won’t help you in the later stages of your business. Thanks for writing!
Ohh great! Thanks for sharing the articles on the topic of venture capital, non- banking financial institutions, microloans, a very informative article, please keep sharing.