Five Financing Trends for 2011
How your startup could benefit from these funding sources in the coming year.
When it comes to funding options for startups, new ideas seem to come along every season. Some may be old ideas dressed up in a new way, while a few may be something we really haven't seen before. It isn't certain which ones will become the new black of small business and which will disappear with this year's hemlines. But here are five financing trends for 2011 that could have an impact on your company.
Kickstarter popularized the idea of crowdfunding, which is when a large group of people help fund a project or business through a cluster of small donations. Kickstarter began as a new way to help artists get projects off the ground. In return for funding, donors receive goods or services, or even just a well-crafted thank-you, in lieu of equity or interest payments. Now the same idea is spreading to business ventures. Diaspora, a tech company that wants to build a social network to rival Facebook got more than $200,000 in seed money from a Kickstarter campaign
Of course, the Securities and Exchange Commission frowns on companies offering equity to the public without filing with the government to do so, so when it comes to crowdfunding backers always get something other than equity. Take Catwalk Genius. Its members fund fledgling fashion designers and in return get a share of the revenue generated by the designer's clothing lines. Then, there's Indiegogo, which leans toward creative and tech business ventures, and peerbackers.com, a community of people specifically looking to support entrepreneurs, which are similar to Kickstarter in that they encourage preselling products as a way to raise funds. Look for more niche-oriented crowdfunding sites in 2011.
The idea of offering very small loans, even just $100, has its roots in helping women in underdeveloped countries start small business ventures. But as the recession tightened credit offerings, the popularity of microlending has extended to the U.S. -- especially as aspiring entrepreneurs are starting ventures with far less than the $50,000 business loan threshold common at many banks. Not-for-profit Accion is the largest organization putting that idea into action with loans that start at $500 and average a little more than $5,000. You can also research other microlending programs around the U.S. through the Association for Enterprise Opportunity's searchable database.
3. Credit Unions
These cooperative financial institutions are among the most active in making smaller loans to entrepreneurs and have only gotten busier in recent years, according to the National Credit Union Administration (NCUA). Its figures show credit unions made more than $33 billion worth of business loans in 2009, up from $12 billion in 2004. They have relatively low default rates and terms that are often better than traditional banks, according to the NCUA and Federal Deposit Insurance Corp. (FDIC). Credit unions also can be a resource for aspiring business owners whose credit score might not pass muster with other banks. The catch? You will likely have to become a member of the credit union to borrow from it.
If you've trimmed your start-up costs down to a few hundred or a couple thousand dollars, why not skip the loan altogether and bootstrap your business? When you tap personal savings, get vendors to front start-up supplies for delayed payment terms, hit up friends and relatives, or use one money-making venture to fund another, then you're bootstrapping. It's a good way to test an idea and make sure it has legs before investing heavily in a new venture. Think of it as the business equivalent of going retro. It's an idea that has been around forever, but is making a big comeback as people who have lost their jobs in the recession increasingly look to start a small business as an alternative to traditional employment.
5. The Slow Money Movement
Woody Tasch, longtime chairman of Investors' Circle, a hugely successful angel network for socially responsible companies, is spearheading the fledgling slow money movement. Its ambitious aim is "a million Americans investing 1% of their assets in local food systems within a decade."
The idea is to help entrepreneurs who buy, use and sell local food or who engage in sustainable agriculture get seed funding from people they know in their communities. The terms are set on a deal-by-deal basis, which can range from a loan to equity to a credit extension. Backers are encouraged to invest in ventures that won't just turn quick profits but will benefit their communities over the long term by creating jobs, supporting other local businesses and the fostering local food chain.
It's ambitious and will likely evolve as it goes. But in its early days so was Investors' Circle, which has facilitated over $134 million in investments in more than 200 companies since 1992. We're interested to see how Tasch will sustain this movement.
Eileen P. Gunn is a freelance writer in New York.