Starting, growing or expanding a small business or trying to expand your current one and need to raise money to get your ideas off the ground?
Getting a traditional bank loan is still tricky for many businesses, especially those with little track record. Even many established small businesses are still having trouble getting bank loans, despite the economic recovery. A survey by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia found that during the first half of 2014, nearly half of all bank loan applications—47%—were rejected.
Some good news, however: Raising money in non-traditional ways has gotten easier, if you know where to look and have a smart concept. Here’s a look at five creative ways to raise money for a startup business:
1. Use Crowdfunding Sites
Some entrepreneurs have struck gold using crowdfunding sites like Kickstarter, Indiegogo and GoFundMe. These sites allow you to find people willing to donate money in order to see your business idea come to life. Currently, these sites only accept donations from individuals, but the Securities and Exchange Commission is expected to finalize rules in late 2015 that would let startups use crowdfunding sites to take on equity investors.
How it works for now: Entrepreneurs create a page that showcases their idea, set a fundraising goal and then solicit donations from the general public. They then have a certain time frame—usually several weeks—to collect pledges. If they reach their pledge goal, the project gets funded by the donors; if they don’t, the project isn’t funded and the donors don’t spend any money.
Many businesses have raised $10,000 or $20,000 using these sites, but some have seen outrageous success. The Coolest—a food and beverage cooler replete with built-in blender, music system and battery charger—raised more than $13 million from 62,000 backers in the 52 days after creator Ryan Grepper launched his Kickstarter campaign in 2014.
Many successful crowdfunding campaigners work tirelessly to get the word out about their idea and generate pledges. They also offer free stuff to their backers: The Coolest, for example, offered backers who pledged at least $165 to the campaign a free cooler once the product is manufactured.
Keep in mind, however, that raising money through crowdfunding sites isn’t necessarily a cakewalk. Kickstarter estimates that only 38% of projects on the site get funded, with the majority of funding projects raising $1,000 to $10,000.
2. Get a Microloan
Startups typically have trouble getting loans from traditional banks because they don’t have a track record or credit history proving their business model is successful. But they can sometimes find organizations and individuals willing to give them small loans of up to $50,000, called microloans.
The U.S. Small Business Administration doesn’t grant microloans directly, but it distributes money to other organizations who give out microloans. The average microloan is $13,000, according to the SBA. Several organizations, including ACCION and community-based groups, help startups and small business owners get microloans—whether it’s to start a restaurant or pay for an upgrade. Some of these groups want to see a credit history, but they often have less stringent standards than banks and will fund startups. Biz2Credit, a company that helps small businesses line up financing, also helps companies identify potential microloan opportunities.
3. Tap Your Vendors and Customers
Many startups would love to find “angel investors” or venture capitalists—wealthy people willing to give them money in exchange for equity. While some lucky startups find such investors, many startups without high-growth ambitions may have trouble finding someone who will swoop in with such a big investment.
However, some startups find that their vendors, suppliers and even best customers—the people who rely on them—are willing investors. Marco Giannini, founder of Dogswell, a healthy dog food and dog treat company, was able to negotiate favorable terms from manufacturers when it first got started, because the manufacturers wanted to keep the company’s business, Giannini told Entrepreneur.com.
Certain well-known companies have gotten into the business of offering their vendors loans. Square, Amazon and PayPal all have units that lend money to merchants. Square, for example, will give its merchants loans, which get repaid by taking a slice of all sales. A $10,000 loan will cost a business $11,300, which gets repaid by Square claiming 13% of all sales through the platform. Note that a business must have at least $250,000 in annual sales to get a Square loan.
4. Find peer-to-peer lenders
While banks may be hard-pressed to give your startup or small business a loan, it may be worth checking out peer-to-peer lending sites, such as the Lending Club, Funding Circle or Prosper.com. These sites line up individuals willing to lend money to individuals and business owners at rates that are generally a few points higher than bank rates.
Lending Club, for example, recently offered loans with interest rates starting at a 5.9% and running up to 30%. Prosper.com recently offered loans with rates starting at 6.68%. While these rates are much higher than standard bank loans, they may be a good option for an entrepreneur who just needs cash to finance a specific purchase and has the ability to repay the lender.
5. Try asset-based lending
If you have accounts receivables or inventory, you may be able to pledge those as loan collateral. Asset-based loans can be a good alternative for businesses unable to qualify for standard bank loans. Lenders will still want to see your financial statements that show you have quality customers who pay their bills.
Asset-based loans charge higher interest rates than traditional bank loans and the lender may require your customers to send their payments directly to them.
Keep in mind that many startups that are successful take the traditional financing route: They “bootstrap”—meaning they use their own income to finance their expansions—or they rely on loans from friends and family. This is less risky than taking on outside lenders and gives you the satisfaction and security of knowing you’re creating your own financial success.
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