Module 6: Financing Options
Other funding strategies
Regardless of where a business is in its lifecycle, raising the necessary funds for a new endeavor may require some out-of-the-box approaches. This is particularly true for companies that don’t have a lot of history or have had some credit issues along the way. It’s hard for new businesses to get loans from lenders because they are seen as a risk.
Following are some other ways to get financing for your business. If you need more ideas, check out Startup Wisdom: 27 Strategies for Raising Business Capital.
You may have heard about crowdfunding in the media. Business crowdfunding sites like Kickstarter and StartEngine have had some major successes and some famous failures. Still, crowdfunding is an honorable and effective way to raise money by soliciting lots of small investments from people anywhere in the world. There are different types of crowdfunding. Some sites encourage businesses to offer rewards for various levels of investment, such as one of the first products off the production line. Others focus on offering equity in your company, exchanging an investment for part ownership in the business.
According to the U.S. Securities and Exchange Commission (SEC), the general public can participate in early capital-raising activities for startups and young businesses. Peer-to-peer lending is a type of crowdfunding that connects small businesses with individuals who lend smaller amounts of money.
Loan Marketplaces & Fintech/Online Lenders
Loan marketplaces are online platforms that allow borrowers to consider different types of financing from various sources, including banks, credit unions, merchant cash advance providers, and online lenders.
Nonbank online lenders provide loans to businesses via internet platforms or direct marketing. These lenders fund loans through various avenues, including loan sales to investors, securitization, or debt from financial institutions. Many of these providers have digital application platforms. They use sophisticated technologies to make lending decisions quickly, but their rates could be higher than traditional lenders such as banks, credit unions and community development financial institutions (see below).
Potential borrowers should carefully assess the benefits and risks involved with any type of financing and request all the terms and conditions before signing any contracts or agreements.
Angel Investors & Capital Venture Firms
Angel investors or venture capitalists provide funds in exchange for partial ownership of your business. Such investors expect to understand the structure and potential of your company from a business plan. If you consider an investor, work with trusted advisors to identify legitimate financing offers and evaluate the pros and cons. The SEC regulates venture capitalists and their private equity firms. Venture capitalists are generally interested in larger, scalable businesses.
Community development loan funds (CDLFs) are typically nonprofit organizations that provide loans and development services to individual consumers and small business customers. Some CDLFs may pursue the Community Development Financial Institution (CDFI) Certification, which the U.S. Department of the Treasury provides to private financial institutions dedicated to delivering responsible, affordable lending, microenterprise and small business development services to low-income and underserved communities.
CDFIs include regulated institutions, such as community banks and credit unions, and nonregulated institutions, such as loan and venture capital funds. Only certified CDFIs can apply for awards offered by the Treasury’s CDFI Fund. CDFIs and CDLFs may have more flexible underwriting than traditional lenders because they were created to incentivize and foster development in distressed areas and communities.