5 Business-Funding 'Rules' to Break
Securing funding for a startup business is undeniably tricky, but alternative methods give today's entrepreneurs more options than ever before. Most businesses haven't really kept pace with the new options. Let's bust some of those antiquated roadblocks and look at the reality of new options.
1. Startups are too risky.
This statement's truth depends on when you read it. The recession burned many investors. In the aftermath, lenders who previously had thrown money at every business opportunity grew understandably cautious. Getting a loan for a startup with no track record was difficult in the years that followed. But it's been nearly a decade since the bottom dropped out. Lending is at an all-time high, with $9.2 trillion in outstanding bank loans. More important, alternative lenders offer different options and often are more willing than traditional banks when it comes to taking risks.
2. Your credit must be spotless.
Not really (thankfully). There's a bit of wiggle room here. While lower credit scores could hurt your chances with some lenders, there are so many to choose from that you should be able to find funding as long as you present the framework for a business plan. Venture capitalists and crowdfunding lenders often are more interested in your idea than your financial history. Many alternative lenders will make a decision based on recent business history, even if your credit is less than stellar. Good credit certainly makes things easier, but big things can happen if you possess the ability to articulate your idea and get buy-in from others who believe in your vision.
3. All online lenders are scams.
Financial technology has come a long way. Today's online lenders have lower overhead and sophisticated software. Fintech offers advantages such as online applications and the freedom to submit information to many lenders at once. This accessibility makes it easier to shop among several online lenders. In general, it's a less discouraging process than visiting brick-and-mortar banks. A fair share of small-business owners may find they have better odds of approval with an online lender.
That isn't to say you shouldn't bring your critical-thinking skills. It's important to know exactly what you're getting into with an online lender. Interest rates and fees can vary wildly. Before you sign up, compare loans, check lenders' reputations, and read all the fine print. If your poor credit score results in an astronomical interest rate, make sure there's no early-repayment penalty. Then, pay extra each month -- as much as you can -- to offset the high interest and reduce the overall cost of borrowing that money.
4. You must have a solid business plan.
It depends. Investors and traditional banks still want to see a business plan, but alternative lenders simply need evidence you can pay back the loan. If your cash flow is steady, you should be able to find funding.
5. Don't ask for too much.
There's a persistent myth that lenders don't want to risk too much on a small-business loan. To be effective, you need to ask for what you need. Borrow only an amount you can comfortably pay back.
A new kind of social capital: crowdfunding.
No summary of alternative financing methods would be complete without a discussion on crowdfunding. Crowdfunding solutions are fantastic, but not every campaign is successful. It's largely a matter of how many people you reach, how much appeal your product has and how interesting your pitch is. Crowdfunding might not ultimately be your best answer, but it can be a great place to start. Response to your project will help you gauge interest, doubling as a potential predictor of success.
Consider which types of projects tend to work best on certain platforms as you decide where to launch your effort. For example, hip new stuff across a variety of categories does exceptionally well on Kickstarter and Indiegogo, while GoFundMe targets personal funding. If you're looking for more of a niche market within crowdfunding, you'll also find several industry-specific sites. Here are a few.
MacroCrowd allows many investors to crowdfund large real-estate development projects with very little risk. MacroCrowd uses reputable FINRA broker dealers and adheres to strict SEC regulations when accepting investments. This prevents all funds from being held by the company directly. Instead, those funds are held in an escrow account with WealthForge.
CircleUp is place where consumer and retail companies can connect with investors. Private-equity professionals evaluate each company before it's listed on the platform. CircleUp is a licensed FINRA broker dealer.
RocketHub provides funding for art, science, education, business and social good projects. This community of like-minded entrepreneurs enables users to share their success stories as a way to help inspire others. The company also has partnered with Bankroll Ventures to create the ELEQUITY funding platform to help entrepreneurs get the funding they need.
AppsFunder matches app developers and investors. An expert panel of judges scores each app on the basis of innovation, technology, business potential and team. Apps that score greater than 70 percent receive a AAA Certified label, which makes funding more likely.
Food Start helps restaurants and food trucks raise capital. Owners can solicit small, incremental investments of $50 to $250 from a number of different investors. In turn, these investors receive perks such as discounts and behind-the-scenes food truck tours. Food Start partnered with BoeFly to help connect food truck owners to more traditional lenders.
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