3 Commonly Overlooked Ways Business Owners Can Raise Funds
Many small-business owners are struggling to find funding in the current economy and business climate. Meanwhile, the regulatory environment has stalled: banks aren't lending as much money, and the huge wave of venture capitalist and private-equity capital has died down. In the tech sector, IPOs are less common than they were a few years ago.
Given these factors, many Silicon Valley companies having a hard time getting the financial support they need. To secure much-needed investment capital for new ventures or growth, small-business owners must think outside the box. If you're in the same position, consider these three commonly overlooked ways business owners can raise funds.
1. Apply for government grants.
If you work in biotech or other research-based industries, you might be able to get government support in the form of a grant. Cities with state college and university campuses also may have research centers and resources available to small-business owners, especially those who lead startups. Landing a grant could require a well-prepared presentation about your business and a formal application process.
If your company's mission is closely tied to agencies such as the Department of Agriculture or the Department of Energy, the U.S. Small Business Administration (SBA) can be another valuable resource. A new biotech company with a focus on research and development might qualify for one of these SBA grants. In contrast, a startup looking to fund a new retail store or launch a consumer smartphone app likely would find it more difficult to secure government dollars. But all three businesses also could turn to private-sector grants from philanthropic organizations such as the Bill and Melinda Gates Foundation.
2. Borrow from a BDC.
Many small-business owners overlook the value of loans from a business development company (BDC). BDCs can be an attractive option for small companies whose finances are in order but nevertheless were turned down by a bank or other financial institution due to their size. A BDC is capable of making larger loans at higher rates than banks, and they don't tie the loan to your personal assets. In many cases, the BDC's terms are more flexible than a traditional lender. Additionally, a percentage of the loan may be equity in the company. Strong BDCs include a venture capital team that supports cutting-edge companies positioned in a promising market. These teams seek out startups with certain attractive characteristics that need help getting established.
This type of finance arrangement can be especially beneficial for startups or companies that need capital quickly. The BDC will make a direct cash loan to your business and may be open to re-negotiating terms in the future. This freedom is key whether your business does extremely well or you struggle to keep up with payments.
3. Explore online lending options.
At the 2015 Lend It conference, former U.S. Treasury Secretary Larry Summers said he expects online lenders to reach more than 70 percent of small businesses. Many online lenders support small businesses and can process entire applications online. Companies such as OnDeck, Kabbage and SnapCap make loan decisions quickly, which means you could have funds in your bank within a few days.
Web-based lenders can command higher interest rates than traditional banks, but the odds of securing funding are substantially higher. Many online banks can approve borrowers with lower credit scores. A 2014 survey conducted by the Federal Reserve Bank of New York found that online lenders had a 38 percent loan approval rate. Larger banks had a 31 percent approval rate. Approval rates at regional and community banks were significantly higher, but those financial institutions also may impose high interest rates or inflexible terms.
Whether you turn to BDCs or online banks for a loan, it's always a good idea to get multiple quotes and review the terms closely. If you apply for a grant, keep in mind that competition is fierce and the chances of rejection are relatively high. However, these three sources of funding can be attractive alternatives for small-business owners who need money quickly and are eager to put financing behind them so they can begin the real work of growing their businesses.
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