Crowdfunding
Crowdfunding involves appealing to the general public, typically via the Internet, to sell small amounts of equity in a private company. Kickstarter (http://www.kickstarter.com) is the most popular crowdfunding site, but others include Crowdfunder (http://www.crowdfunder.com), Wefunder (http://wefunder.com) and MicroVentures (http://www.microventures.com).
Generally, crowdfunding best suits startups and small businesses — particularly those with strong local ties or legacies. A beloved neighborhood restaurant, for example, is likely a prime candidate for a successful run at this type of financing. When it comes to new businesses, a good back story, a strong sense of purpose and social media savvy are beneficial.
Angel investors
An angel investor is an individual or organization that offers equity investments, loans or loan guarantees to businesses in targeted industries — generally those with which the angel investor is familiar. Several websites, including AngelList (https://angel.co) and Angel Capital Association (http://www.angelcapitalassociation.org), offer ready access to a wide variety of potential investors.
This source of capital suits established small to midsize businesses that want a more substantial and long-term financing arrangement. Companies with a track record are in a better position to provide the proven business plans and sophisticated financials that angels want. However, an angel investor may seek an advisory presence in your business to mitigate risk.
Small Business Administration
Although Small Business Administration (SBA) lending declined during the recent recession, the government agency is now taking steps to boost lending to smaller businesses. The SBA recently began waiving the fees it charges banks for guaranteeing loans of less than $150,000, and has streamlined the loan approval process.
However, even with simpler processes in place, you’ll need to submit extensive paperwork and be prepared to explain and justify your past business decisions and future plans. Keep in mind that, to apply for an SBA loan, you must first have been turned down by a bank or other financial institution. You must also meet certain size requirements, which vary by industry, and other criteria may apply, depending on the program. Visit http://www.sba.gov for more information.
Other options
Crowdfunding, angel investors and SBA loans are only a few of the alternatives to a traditional bank’s loan offerings. Other options include venture capital — where investors take a significant stake in your business in exchange for money and management advice — and asset-based financing. The latter, which is best suited to manufacturing and other hard asset–intensive companies, requires you to offer inventory or equipment as collateral.
Understand that fees and interest rates for some types of alternative financing arrangements are higher than those in traditional lending. Your financial advisor can help you weigh the advantages and drawbacks of each option. •
Other articles in the September 2013 Edition of Business Matters: