Access to Capital (continued)
Government contracts are an often-overlooked revenue generator for small businesses. Even in tough times, government agencies continue to have purchasing needs, whether it’s janitorial services, technology, supplies or consulting services. The Request for Proposals (RFP) process can seem a bit daunting at first. But once you get the hang of it, it’s easy to apply for multiple contract opportunities since many of the components of your first response can be copy and pasted into subsequent ones.
The benefits of contracting outweigh the seemingly laborious process. Governments are less likely to have huge swings in purchasing practices since the budgets tend to be stable. They don’t skip out on bills either. As a successful bidder, your contract may end up being for multiple years or renewable, giving you multiple years of predictable income. You can also become a preferred contractor in the government’s database. In many cases, agencies can use “master contract” contractors without going through a formal request for proposals process.
As a Washington State business, the state offers an excellent series of tutorials and how-tos on their Department of Enterprise Services (DES) website to help you get started. County and city contracting entities have similar guides and tutorials.
Rewards-based funding through sites like Kickstarter and Indiegogo allows you to offer an incentive in exchange for an investment in your product or service. For instance, you may offer a t-shirt for a $50 donation or early access for $100 or more. It’s up to you to decide the premiums and investment levels. It’s best for companies that have an established list of contacts or public awareness. The campaign’s success is up to you – you need to do all the networking and marketing to get donations. On the plus side, there are no investors to answer to and no interest or loan payments to make.
The other option is equity-based crowdfunding. This can be a good strategy if you are building a new company or rebuilding an existing one where investors believe in you, the company and your vision for the future. This works particularly well for companies or business owners that have a historical track record of success and whose businesses encountered tough times during the pandemic. Investors are betting on you and your idea. However, understand that you’re trading out part of your company in the form of equity. This type of funding can also draw the scrutiny of regulators. Republic, CircleUp, and Crowdfunder are good sites for this.
Fundable offers owners both options, rewards-based and equity-based crowdfunding.
In action: Internet cartoonist Matthew Inman wanted to create a card game for kids seven and older, so he started a Kickstarter campaign. Exploding Kittens became one of the most quickly funded campaigns on the site, bringing in $8,782,571. Exploding Kittens has raked in more than $50 million since.
As with crowdfunding, attracting outside investors can increase the chance that you will draw regulatory scrutiny. The investing space is tightly regulated. However, many small businesses have had tremendous success attracting outside investment, using the capital to build their business.
Venture capital is one option, though VCs are more likely to invest in a small business or startup that shows promising long-term growth rather than a seasoned company. A business in the rebuild stage may not be an easy sell unless you can clearly show that you were going like gangbusters before the pandemic and that COVID was the reason why your enterprise was temporarily derailed.
Angels use their own money to fund ventures, and if they invest, you may also end up with a mentor who is willing to help you put your business back on track. The tradeoff is equity, either in the form of a convertible promissory note or a voting position in the company’s management team.
Before you consider an outside investor, you’ll want to do your homework first. Courting outside investment can be time-consuming, and the time may be better spent rebuilding your business the old-fashioned way.
In action: Apple Computers was not even a year old and had sold just a couple of hundred computers when Mike Markkula arrived on the scene in 1977. He told Steve Jobs and Steve Wozniak that he was willing to invest $250,000 in the new company in exchange for one-third ownership in Apple. Mike not only brought money to the company but experience and connections. These connections helped Apple get the venture capital it eventually needed to grow into the multi-billion dollar company it is today. Without Mike, there may never have been a Macintosh or an iPhone.
When cash is tight, bartering may help stretch every precious dollar. If you have a network of business owners, suppliers and contractors, you may be able to trade skills, expertise and services with one another as a mutual benefit. For example, you may have a friend who does marketing and also needs some work done on her house. You offer to do the job since you’re handy with a hammer, and she does your website in return. The cost zeros out in terms of the labor, so it’s a win-win.
Other Ways to Fund Your Business
It’s no secret that securing financing can be a challenge for some, particularly in underserved and underrepresented communities.
Despite leading in business creation, minority business owners historically have a much harder time accessing small business loans than their non-minority counterparts. Even if they are approved, the interest rates may be statistically higher, and the total loan amounts lower. Many business owners won’t even apply for small business loans because of poor terms or the fear of being rejected.
The Community Development Institutions Fund is a network of banks and credit unions that serve people who are otherwise locked out of the financial system. CDFI focuses on developing long-term relationships with members of the community to strengthen financial literacy, establish savings strategies, build credit, and fund small businesses, microenterprises, nonprofits, commercial real estate, and affordable housing.
Microloans are another possibility. These small loans are particularly suited to businesses that don’t require large amounts of cash. Microloans can range from $500 to $35,000 and are funded through private institutions and the Small Business Administration. The term of the loan can be two to six years with favorable interest rates. The downside is that microloans typically have higher costs to administer the loan since it costs a lender the same to lend $1,000 or $100,000, so finding a lender is more difficult because these loans are less profitable to manage.