Venture capital: As an entrepreneur, you’ve undoubtedly heard of it, but you may not be familiar with exactly how it works or whether it could be a good option for your business. You may be wondering if your startup is even eligible for venture capital. Keep reading to learn what venture capital is, what sorts of businesses and entrepreneurs are good candidates for VC funding, and how to go about tapping into this resource!
What Is Venture Capital?
Venture capital is a type of equity financing where investors provide capital to a young business with high growth potential in exchange for equity in the business. In addition to ponying up startup funds, VC investors also give direction to the companies they invest in to help them succeed. The venture capitalist’s long-term goal is to make a profit when the company they invest in goes public or is sold to another company.
Venture capital firms are usually looking to invest in tech companies, though some may specialize in healthcare or other industries. Most VC firms specialize in a specific type of industry, focusing on businesses that are in a particular stage of growth. VC firms are often located in or near tech metropolises, such as New York City, San Francisco, Boston, and Austin, and usually (but not always) focus on businesses in their immediate region.
How Venture Capital Works
Most everyone has seen Shark Tank, but in actuality, there’s a bit more to VC than making a quick pitch to a room of hyper-critical rich people. Securing VC funding is a little less intimidating than defending your life’s work to Mark Cuban in under five minutes, but it’s also a long, multistage process. It requires a significant amount of patience, diligence, and flexibility, as you may have to change your company to fit your investor’s vision for growth. You should also keep in mind that VC funding is extremely competitive, and your company must have a lot to offer potential investors â only about 0.05% of startups are able to obtain this coveted form of capital.
Venture capital is not a loan; venture capitalists invest in companies in exchange for equity or ownership in the company, betting that they will make money if your company does well. So what are these entities that supply venture capital? Generally, they are investment firms (rather than individual investors). Venture capital investment firms raise and pool funds from a range of sources, from corporations to nonprofits, pension funds, and wealthy individuals. These investors are limited partners in the venture capital firm.
VC financing is risky for the investor, which often loses money when a company fails. However, they know that not every company they invest in is going to be the next Uber or PayPal. The VC investor can offset their risk by investing in many different businesses, some of which may deliver a phenomenal profit. Most VC firms make a profit of about 20% a year.
How Venture Capital Compares
Venture capital shares similarities to certain other types of startup financing, but there are also some important differences you should know about.
Venture Capital VS Debt Financing
As mentioned, venture capital is a form of equity financing. Equity financing differs from debt financing in several ways. Namely, debt financing is structured as a loan, which you have to pay back with interest. However, the debtor is just a debtor; they don’t own any part of your company or have any say in your business decisions. Some examples of debt financing include lines of credit, business credit cards, and SBA loans.
Venture capital is not a loan, so the recipient does not have to pay it back or pay any interest or fees. VC also includes more than just capital â you also get business guidance and mentorship. But in exchange for the help getting your business off the ground, you have to forfeit some control over your company to the venture capital firm. Also, unlike debt financing, which serves a wide variety of business types, only certain kinds of businesses â technology and innovation businesses with high growth potential â are good candidates for venture capital.
ReadÂ Pros & Cons Of Debt VS Equity Financing to learn more about the differences between debt financing and equity financing (such as venture capital).
Venture Capital VS Private Equity
Venture capital and private equity are both types of equity financing and are similar in several respects. PE investment firms and VC investment firms both provide capital to privately-owned companies, using pooled funds from investors that are limited partners of the firm. The main difference is that VCs invest in startup companies in exchange for a minority stake in the company (less than 50%). In contrast, PEs invest in mature companiesÂ for a majority stake (more than 50%).
Also, while VC-backed companies tend to be innovative and tech-focused, PEs tend to invest in traditional industries, such as retail, restaurants, and manufacturing. The types of mature companies PEs invest in need capital to expand, address inefficiencies, or fix stagnation related to lack of capital.
Venture Capital VS Angel Investors
Angel investors also have a lot of things in common with venture capitalists. Angel investors invest in privately-held companies in exchange for equity, but these investors tend to be high net-worth individuals or groups of individuals (rather than investment firms). Most angel investors are entirely profit-motivated, but some angel investors are at least partially motivated by philanthropy. For example, there are angle investment groups dedicated to helping fund underserved business owner demographics, such as women-owned businesses or veteran-owned businesses.
Angel investors typically offer smaller investments and have a more hands-off approach to supporting your company. They also tend to serve a wider variety of industries than VC companies and offer more flexible terms.
When Venture Capital Is The Right Choice For Your Business
The following are attributes of business owners who are well-suited for venture capital investment:
Your business is related to technology or innovation (some examples include web-based tech, sustainable energy, fintech, healthcare technologies, scientific research, software development, electronics, and telecommunications)
You are fine with eventually selling your company, and you have an exit plan if you do sell
You can see your company going public at some point, and you have considered the pros and cons of doing so
You are okay with divesting some control over and stake in your company to an investor (control freaks and VCs aren’t a good mix)
You are a serial entrepreneur (or aspire to be one); that is, you develop companies with a plan to sell them or take them public and then start another one
You have a lot of business connections, and, ideally, some of these connections are in VC
Your company is located in or near a venture capital hotspot (such as the Bay Area, Silicon Valley, LA, NYC, etc.)
If Venture Capital Is The Right Fit: Next Steps
Do you fit the above criteria? Here’s what the process of obtaining venture capital might look like for you.
The beginning of your venture capital journey is all about finding the perfect fit. It’s a lot different than getting a bank loan, where you simply apply to various lending institutions that provide financing for a variety of business types. With venture capital, you need to find an investor that caters to your specific type of business in your particular stage of growth â for example, semi-established fintech companies or healthcare technology companies that haven’t gone to market yet. Location matters, too â whether your company is based in the Bay Area, Silicon Valley, or elsewhere, you will want to find and nurture VC contacts in your local market.
Once you have found a suitable VC firm to approach â and, ideally, you should already have a relationship with this firm rather than contacting them out of the blue â you can pitch your idea/company and see if they will consider funding you. If it’s a good fit, and they decide to move forward and invest in you, the investor will perform a valuation of your company, both before and after the cash infusion. The valuation will determine the percentage of stock the VCs will own in the company and may also determine the amount of influence the investors have in steering the company before your IPO or sale.
Stages Of Funding
After a deal has been agreed on, funding begins. This usually happens in several rounds, the first of which is called seed funding. Seed capital is meant to get a very new business off the ground (the average seed round is $2.2 million) and may be used to do things, such as develop a prototype, assemble a management team, or create a business plan. Successive rounds of funding, called series, may become available as the business expands. Series A funding and Series B funding, for example, focus on somewhat-established businesses that are already offering a product and have a customer base, whereas Series C funding helps mature companies expand or even acquire other companies. Different venture capital firms usually cater to different specific phases.
From sending your pitch deck to attending meetings with investors to performing due diligence, it can take from six to nine months or longer to get your first round of seed funding.
Learn About Other Types Of Financing For Startups & Entrepreneurs
If VC isnât the right fit, that’s okay. There are many other types of financing that might be better suited for your small business. Some options include small business loans, small business grants, crowdfunded loans, personal loans, and lines of credit. Start your research by checking out these resources with relevant information about various forms of startup financing.
8 Alternative Funding Sources If Venture Capital Isn’t The Right Fit For Your Startup Or Small Business
6 Financing Options For Up & Coming Entrepreneurs (Plus 4 Expert Funding Tips To Get You Started)
20 Best Ways To Finance A Business Start-Up
What Is Venture Debt & Is It The Right Type Of Financing For My Startup Business?
What Is Debt Crowdfunding & When Is It The Right Choice For My Small Business?
Small Business Startup Loans: Your 8 Best Options
Do I Qualify For A Startup Grant?
The post What Is Venture Capital & How Does It Work? appeared first on Merchant Maverick.
In the mythology of startup culture, no figure looms quite as large as the angel investor. These fickle, godlike beings can become so enamored by your entrepreneurial genius that they come down from heaven and offer you vast sums of money to help manifest your dreams.
But are they mostly just hype? How do you get their attention if you want to work with them? What kinds of businesses are they a good fit for?
Below, we’ll pull these mysterious figures out of the clouds and see what they’re made of.
What Is An Angel Investor?
An angel investor, or sometimes just “angel” in the investment world, is an individual who reinvests some of their wealth into startups that are very early in their development process.
Prior to 2012, these were specifically accredited investors earning more than $200K a year or who owned over $1 million in assets. Now, thanks to the JOBS Act, the term also includes less wealthy people who, with or without accreditation, invest in a company through crowdfunding platforms.
These investors may act independently or as part of a network of angel investors. In 2019, angel investors accounted for around $228 million in startup investments.
How Angel Investing Works
The classic catch-22 for startups is that they don’t have money to begin operations, but they can’t get loans because they aren’t yet generating any revenue. You can hardly blame banks and other lenders for not wanting to take that gamble. The failure rate for startups is extremely high, somewhere between 75% and 90%, depending on how you define them. They simply don’t fall into traditional risk models.
Angel investors aren’t offering money in exchange for debt. Instead, they’re buying equity in your business. The percentage of your business they’ll ask for will vary from angel to angel and deal to deal. Typically, the more money they’re offering, the larger the share of your company they’ll want in return. You will be giving up at least some control of your company, though frequently less than you would if you received venture capital. For the angel, this is a high-risk, high-reward investment. Statistically, they’re likely to lose their investment, but the rewards that come from investing in a successful startup can be enormous.
Angel investors may invest in your company as:
Individuals: Essentially, the angel will invest in your company, along with any of your friends and family who are trying to help your business get off the ground.
As A Group: Nowadays, many angels pool their resources into groups that can then collectively review and examine business proposals. This may also include certain types of crowdfunding, where the funders are getting equity and not just, say, a product or reward.
The Difference Between Angel Investing & Venture Capital
So wait a minute, these are people who invest in startups early in their lifecycle? That sounds a lot like venture capital. What exactly is the difference between an angel investor and venture capital? Are they the same thing?
No, but they swim in many of the same pools. For starters, venture capital tends to come from venture capital firms that pool resources from different individuals, funds, banks, and other entities. Venture capitals tend to specialize in specific types of are startups, developing some expertise in the lifecycle of, for example, mobile software application startups. Many VCs are even more specialized than that, focusing on specific phases of early business development.
Angel investors, even if they have their fingers in some venture capital organizations, invest their own money directly in a startup. Not only that, but they tend to invest at earlier stages of business development than venture capitalists. They specialize in investing in companies that aren’t yet at the stage where they can raise venture capital.
Finally, while both angel investors and venture capitalists will take shares in your business, angel investors tend to not be as hands-on with the day-to-day operations of your business. Where venture capital firms will demand a formal role in your business (such as a seat on your board), angel investors often take on more of an advisory role.
Is Angel Investing Right For You?
There are a few factors to keep in mind when you’re evaluating whether or not angel investing is a good way to fund your startup.
Do You Want To Give Up Equity?
Equity financing may seem like a godsend when you aren’t generating any revenue. It’s almost like free money.
Don’t let the “almost” fool you. You are selling a percentage of any future revenue you generate, and if your venture is successful, it may be worth far, far more than the debt you would have paid for a loan. Not only that, but the angel investor will likely want to have some input into how your company is being managed. This isn’t always a bad thing, as many angels are experienced entrepreneurs themselves and may be able to offer valuable advice. On the other hand, they may have a different vision than you do, and you may end up having to manage their expectations in addition to your business.
Do You Want To Put In The Time To Find An Angel?
It’s no coincidence that they’re named after a mythical entity â angels don’t grow on trees. Be prepared to make a lot of cold calls, attend a lot of unproductive meetings, and shake a lot of hands. Angels tend to want to invest in industries in which they have some expertise, so not only do you have to connect with an angel investor, you have to find one who invests in your type of business.
How good are you at schmoozing?
Is Your Business Plan A Good Fit For Angel Investing?
Angels are looking for a big return on a high-risk investment. They’re prepared to wait a few years to see it, and they’re even willing to risk losing their investment.
What they’re probably not going to do is invest money in a business with a slow, conservative growth plan that will pay out comfortable but modest wages for the management team. They’re looking for intriguing intellectual property and gigantic markets for your product.
They’re looking for exit plans, so make sure you have some enticing ones.
Are You Located In A Community With A Thriving Angel Investor Scene?
With the advent of crowdfunding platforms and similar networks, this may not be as big a deal as it once was. However, whenever you’re talking about any kind of hotshot investor, it immediately conjures a handful of big cities known for generating startups. There’s simply more local investing infrastructure in places such as New York City, Los Angeles, San Francisco, and Austin than there are in most other cities as well as more of a “risk-taking” culture.
That doesn’t mean you can’t find it elsewhere, only that you may have to be more creative about how you go about seeking angel investment.
Can You Deal With The Consequences Of Failure?
You can breathe easy; I’m not talking about broken kneecaps and Molotov cocktails. Angel investment is, by and large, very safe. Just keep in mind that angel investors form networks and talk to each other at great length about the businesses they’ve funded. If you develop a reputation as a poor investment, it’s likely to get around and make it more difficult to secure angel investment in the future.
If Angel Investing Is The Right Fit: Next Steps
If you think angel investment is right for you and that your startup idea fits the profile of a company that angel investors would be interested in, you’ll be wanting to know what’s next.
1) Highlight Your Leadership Skills
Angel investors are going to prefer to work with a known quantity and someone who has experience successfully bringing a product to market. If you look like you know what you’re doing, you’ll have an easier time raising capital.
2) Touch Up Your Business Plan/Proposal
Make sure you’re emphasizing elements that will catch an angel investor’s eye. Highlight the size of the market you plan on reaching, the value of your IP, and your exit strategies, including possible acquirers.
3) Find Some Angels
Now you need to find some investors. If you aren’t lucky enough to be networked in with the angel investment scene, you’ll want to hit up some online networks. These include groups such as AngelList, Gust, and even more generalized platforms (e.g., LinkedIn). Be sure to also check with groups in your local business scene; you never know who might be able to make an introduction for you.
Learn About Other Types Of Financing For Startups & Entrepreneurs
While many startups would love to work with an angel investor, keep in mind that there are other ways to finance your business should they prove elusive. We’ve already talked a little bit about venture capital, which is another type of equity financing commonly used by startups. If you’ve never heard of venture debt, it’s worth keeping in mind if you need to fund working capital or equipment expenses along the way. You may also be interested in crowdfunding in a more general context.
Finally, if you don’t think your business model is a good fit for equity financing, you may want to look into using a personal loan for business expenses.
The post What Is An Angel Investor? When Is It The Right Choice For Business Startup Financing? appeared first on Merchant Maverick.
Interest in Cannabidiol, commonly known as CBD, has skyrocketed in recent years as people have turned to this cannabis-derived substance for a variety of medical ailments. While the FDA has approved CBD as a treatment for seizures caused by two forms of epilepsy, many use CBD to treat a variety of different conditions from anxiety to pain disorders, though the FDA has not yet approved it as a treatment for these conditions. Nonetheless, the 2018 federal legalization of hemp and hemp-derived products (with restrictions) has sparked a boom in CBD-related commerce.
Unfortunately, an opaque thicket of legal and regulatory complications still makes it difficult for a CBD business to get approved for a loan. In this article, we’re going to delve into the factors that complicate a CBD business’s quest for funding and help direct you to the types of loans a CBD business can qualify for â and where to look for them.
Why Most Lenders Refuse To Loan To CBD Businesses
If you’re running a CBD business, it can be hard to obtain a business loan. You’ve likely already discovered this if you have a CBD business, and you’ve tried to secure funding for it.
Until the enactment of the 2018 Farm Bill, hemp (which legally must contain 0.3% or less of THC, the psychoactive component of cannabis that produces the “high”) was just as illegal in the US at the federal level as psychoactive cannabis, as the Controlled Substances Act did not differentiate between the two. This means that until just two years ago, it was illegal for federally-insured financial institutions to lend to sellers of CBD, despite the existence of various state laws establishing state-legal markets for both CBD- and THC-containing products.
Even though growing and cultivating hemp has been fully legal for two years, lending institutions haven’t built up much institutional memory when it comes to navigating the complexities that still exist surrounding the sale of products derived from the Cannabis sativa plant. Hence, many banks still shy away from lending to CBD companies, while other lenders might deal with some sectors of the CBD industry but not others.
Regardless of the headaches involved, it is possible for you to get a loan for your CBD business. Let’s discuss the types of loans best suited for companies dealing in CBD products.
Best Types Of Loans For CBD Businesses
The type of loan you’ll want to look for will depend on the kind of expenses you intend to put the money toward. Let’s discuss the different types of loans a CBD business would typically pursue.
With an equipment loan, the equipment you use the loan to buy is used as collateral for the loan. If you’re in the business of growing hemp, you may need an equipment loan to purchase machines to harvest and extract the flower. If yours is a smaller boutique operation, and you want to grow indoors, you could use an equipment loan to purchase grow lights, inline fans, and other hydroponic supplies. Once you’ve fully repaid the loan, the equipment will be yours to keep. However, if you default, say goodbye to the supplies.
Merchant Cash Advances
A merchant cash advance can be a good option for a CBD startup without any business history or a CBD business struggling to qualify for a traditional business loan. Merchant cash advances provide you with a short-term cash infusion. In exchange, you repay the advance either by sending the lender a percentage of your sales on a daily basis (though some providers may let you pay on weekly or monthly) or by repaying a fixed amount on a daily (or weekly/monthly) basis.
Merchant cash advances are not typically recommended as an option of first resort due to the pricey fees charged and the fast repayment required. But for the CBD business unable to qualify for a traditional loan, a merchant cash advance can be a workable short-term funding solution.
Lines Of Credit
If you don’t need a large lump sum of cash and instead want a credit line you can draw from similar to a credit card, a business line of credit may work for your CBD business.
With a revolving line of credit, the total amount you can borrow (referred to as aÂ credit facility) gets replenished as you repay the money you’ve actually borrowed. This way, you only borrow the money you need while keeping a financial safety net in place that you can draw from should a pressing need arise. The main caveat here is that a line of credit can be difficult to qualify for â perhaps even harder to qualify for than a traditional business loan. CBD businesses with at least six months of business history are much more likely to qualify.
We’ve discussed alternatives to “regular” business loans here, but depending on where you look (we’ll get to that part in a moment), you may, in fact, be able to qualify for a traditional business term loan.
You might be looking to expand your operations significantly or engage in other money-intensive projects. In that case, a term loan will cover your needs more effectively than some of the “alternative” types of loans, many of which involve smaller amounts of money and shorter repayment terms. Of course, without any business history, traditional business loans are quite difficult to obtain, so CBD startups may need to look for another type of funding.
Where To Find CBD Business Loans
As I’ve mentioned, banks tend to be skittish when it comes to dealing with anything related to the historically-stigmatized (not to mention criminalized) Cannabis sativa plant. If you have a good working relationship with your current bank, you may want to discuss the possibility of getting a loan for your CBD business with them, particularly if they have a track record of being progressive on other issues. Don’t be surprised if they turn you down, however â and if you have reason to believe that even broaching the subject with your bank might jeopardize your existing relationship with them, skip this step altogether and look elsewhere for funding.
As it happens, you’re much more likely to find an online lender willing to work with your CBD business. Try seeking a loan from one of the following online sources:
A simple online search will turn up a number of companies offering funding for qualifying cannabis-related businesses. While some of these lenders specialize in recreational or medicinal marijuana and not CBD businesses specifically, they may still be willing to work with you. Contact a cannabis lender to see if yours is the sort of business they’d like to work with (and vice versa).
Other online lenders offer loan products to borrowers considered “high-risk.” These lenders may be more likely to lend to you than your standard online lender. Read our article about high-risk business loans to get a better idea of this part of the lending industry.
Some online lenders specialize in crowdfunded loans. Getting a crowdfunded loan â also known as peer-to-peer (P2P) lending or debt crowdfunding â involves having a lending platform offer your proposed loan terms to a crowd of loan investors. You then pay back these investors with interest.
Individual investors may be more inclined to work with a CBD business than larger, more cautious lending institutions. That’s why debt crowdfunding sites are worth checking out for owners of CBD businesses. Check out our explainer piece on debt crowdfunding to learn more.
How To Make Sure Youâre Getting A Good Deal
Unfortunately, there are plenty of shady business loan servicers out there that gravitate toward businesses considered high-risk. To assess whether a given lender is legitimate and whether the loans they offer are reasonable, you’ll need to do your due diligence:
Check The Lender’s Online Presence
Any fly-by-night outfit can create a cheap website touting its lending services. A genuinely convincing online presence is harder to fake, however. Check for any social media accounts associated with the company. Search for news articles and press releases that mention the company. Look at the company’s About page on its website (it should have one!) and see if it seems legit. See if you can find names and/or profiles of the people who run the company. Lastly, look for user reviews and comments about the company. While most every lender has its detractors, you should find at least some evidence of a legitimate company by reading customer feedback.
Examine The Full Cost Of Borrowing
When considering a lender’s loan products, it’s important to look at more than just what your monthly payments will be. Look out for any extra fees you might find yourself on the hook for, including:
Check Reviews Of The Lender
It’s always helpful to read a professional reviewer’s opinion of a lender, as you’ll gain insight from the research done on the company’s history and from comparisons to the leading lenders in the field. To that end, check out our full list of small business loan reviews, You can filter your search and get results fitting your business situation by entering your time in business, your credit score, and other factors. Pretty cool, huh?
We’ve also got a handy guide to the top small business lenders of 2020, along with our small business loan comparison chart.
Other Resources For CBD Businesses
Here are some additional resources for those of you in the CBD industry or the cannabis industry more generally. If you’re just starting out or if you want to build up your current operation, have a look!
Everything You Need To Know About Finding A CBD Merchant Account & The 6 Best CBD Payment Processors
How To Finance A Medical Marijuana Dispensary
Need A Merchant Account For Your Medical Marijuana Dispensary?
Need A High-Risk Merchant Account? Here’s The 6 Best Payment Processors To Work With
What Are High-Risk Business Loans & Where Do I Get One?
The post How To Get A Loan For Your CBD Business (Without Getting Scammed In The Process) appeared first on Merchant Maverick.
If you’ve spent any time here on the Merchant Maverick website, you already know what most business owners are looking for: funding. Sure, we all want to be successful and fulfilled by doing what we love, but the only way businesses can do that is with access to capital.
Of course, you can always hit up your local bank or credit union, search around the web for online lenders, or launch a crowdfunding campaign. But why limit yourself to these options when you can attract investors that bring capital, industry experience, and so much more to help your startup business grow.
Whether your startup is already showing signs of success or your business is still just a plan for the future, if you’re interested in how investors can help you take your business to the next level, then this article is for you. In this post, we’re focusing on two types of investors: venture capitalists and angel investors.
It doesn’t matter if you have a little bit of knowledge about these investors, or you’ve only heard them mentioned in news articles. This post breaks down the definition of each, explores the differences between the two, and even offers recommendations for how to choose the best option to fit your business’s needs. So sit back, relax, and let’s jump in.
What Are Venture Capitalists?
A venture capitalist is an investor or firm that gives businesses the money they need to grow from a fund â a pool of money from multiple people. Unlike a traditional loan, this capital doesn’t get repaid on a set schedule. Instead, the investor receives equity in the company â in other words, ownership within the company. We’ll explore equity and what it means a little later.
Venture capitalists typically invest in businesses that have high growth potential. Businesses that receive capital from venture capitalists should be poised to move quickly to grow and expand. Most often, businesses that are funded by venture capitalists are already somewhat established.
What Are Angel Investors?
An angel investor is a little bit different from a venture capitalist. An angel investor is an individual (or in some cases, a group of people) that is well-off and wants to invest in a business in exchange for equity or convertible debt. The invested capital doesn’t come from a fund but instead comes directly from the angel investor.
Angel investors also typically gravitate toward companies with high growth potential. However, angel investors are more willing to take on higher-risk businesses, such as startups and early-stage businesses.
Angel Investors VS Venture Capitalists: Key Differences
Are you still scratching your head? Let’s break down the definitions of angel investors and venture capitalists, then take a look at the key differences between the two.
When you work with a venture capitalist, you will work with a venture capital firm or employee of a venture capital firm. This individual or group uses a pooled fund to provide businesses with capital. The pool could include funds from corporations, university endowments, pension funds, and/or other big investors.
If you work with an angel investor, you will receive capital from a successful, wealthy individual or even a group of well-off individuals. This money doesn’t come from a fund but instead comes directly from the individual or group. In other words, they are using their own money, not someone else’s.
Angel investors are not required to be accredited, but many are, which means that they either earned $200,000 per year over the last several years or have a net worth exceeding $1 million.
Types Of Businesses
Venture capitalists provide capital to businesses with high growth potential. These businesses are typically in a position to grow quite rapidly and have already shown a history of success. These businesses can be in a variety of industries, from food startups to up-and-coming technology.
Angel investors, on the other hand, are more willing to work with businesses in their very early stages. Once a business has used other methods of funding, such as friends and family, small business loans, or crowdfunding, it may opt to seek capital from an angel investor before working with a venture capitalist.
Angel investors typically invest in businesses that they are familiar with. Someone who made their money off software or real estate, for example, would be more apt to invest in a new software company or real estate venture.
Another big difference between venture capitalists and angel investors is how much they are willing to invest.
One thing to note is that the amount invested varies based on a number of factors, so these are just a few averages to give you a better understanding of what type of capital each kind of investor is willing to invest.
Venture capitalists invest a much higher amount of money â think millions of dollars. On the flip side, angel investors are more conservative, investing, on average, about $25,000 to $100,000 per company.
Equity & Convertible Debt
Whether you receive capital from a venture capitalist or an angel investor, the repayment terms are different from other forms of business funding (such as business loans). Business loans and lines of credit are types of debt financing. That means the business repays the money it borrowed as well as fees and interest assigned by the lender.
Capital received from venture capitalists and angel investors is known as equity financing. Instead of repaying borrowed funds, the investor receives an ownership stake in the business. This means the investor is entitled to a share of the profits and may also be able to make important decisions regarding the business.
How much equity exactly? Well, it depends on multiple factors, including the amount of the investment and the expected return. To get a general idea, venture capitalists may expect equity from 10% to 80%. That’s a very large range, but again, there are multiple factors to consider, and every deal is different.
Angel investors generally expect equity of 20% to 50%. While this can be quite a large share of ownership, remember that these investors are more apt to take on riskier businesses in very early stages.
While both types of investors are repaid through equity, there is one minor difference between the two. In some cases, a borrowing agreement with an angel investor may include convertible debt. Convertible debt is debt that can later be converted to equity â ownership in the business â at a later time as agreed upon by the investor and the borrower.
Now, what happens if the business isn’t successful? Will you be required to pay back the investment made in your business? The good news is that no, you won’t necessarily be on the hook for repaying your investors. However, the investors could liquidate your business and collect all or a portion of their investment if your business fails.
One of the biggest advantages of having an angel investor or venture capitalist back your business is that you can obtain more than just capital. While the resources available to you vary depending on your industry and the investor you work with, your investor may have ways that can help fuel growth and improve your odds for success.
In addition to the capital you’ll receive from a venture capitalist, these investors can also help you build industry connections or even find access to other sources of funding.
Angel investors â particularly those that stick with what they know â can often serve as mentors. An investor that made millions in real estate, for instance, can teach you the ins and outs of the business, share industry secrets with you, and help your real-estate-focused company grow.
Which Is Best For My Startup Financing Needs?
Are you ready to take your startup to the next level by seeking out an investor? Before you do, understand which type of investor is best for your business. Know the needs of your business, understand what to look for, and you’ll be ready to take the next step toward getting funding.
Look For Venture Capital If…
Your business has tapped into all other financial resources, including friends and family, crowdfunding, and other types of funding
Your business is at least somewhat established and is poised to grow once you have secured an investor
Your business is very innovative and/or has high growth potential
Your business needs a large amount of capital â for example, $1 million or even more
Your business is positioned to see a large amount of growth and profit that’s worth investing in
You’re prepared to give up equity and control within your business
Look For Angel Investing If…
You’ve used some financial resources, but you’re not yet ready for venture capital
Your business is new or in the very early stages
Your business needs a smaller amount of capital to grow
You’re prepared to give up equity and/or take on convertible debt
In addition to capital, you want your investor to bring industry experience and knowledge to the table
Learn More About Angel & VC Funding
Still undecided on which path to take? Or perhaps you just want to know more about these two forms of alternative funding. If so, check out our other great resources about angel investors and venture capitalists. As with any other type of business funding, make sure to do your research, explore all options, and weigh out the pros and cons. Good luck!
The post Angel Investors VS Venture Capitalists: Whatâs The Difference & Which Is Right For Your Startup? appeared first on Merchant Maverick.
You’ve probably heard the old cliche: You’ve got to spend money to make money. It’s obnoxious, but it does highlight a real problem that anyone setting out to start a business venture will likely encounter. Businesses are investments, and investments imply an allocation of money.
Or do they?
We put out our feelers and talked to business owners who say they started their companies without any substantial outlay of money. How did they do it? What advice would they give other broke entrepreneurs? Read on to find out.
Tip #1: Don’t Quit Your Day Job
At least not right away. You’ll probably need to rely on your current job to keep the lights on while your new business venture finds its feet. According to Jason Littrell of Jason Littrell Ltd.:
I started my business over ten years ago with absolutely no money. I didn’t even have an LLC for six months. The misconception that you need money to start a business really bothers me, so I wrote a book about it. The truth is you can start a business while you already have a job. In the COVID economy, it’s about taking a thorough inventory of your skills and building a business. The hardest part for most people is the sales and marketing part. Most people have a very troubled relationship with money, thus have a difficult time asking for it. You don’t even have to marry your niche, you can just date it for a while to see if it’s working for you. If not, simply change it.
Tip #2: The Type Of Business Matters
Not all businesses are the same when it comes to starting costs. Considerations such as the equipment needed to run your business, any required physical space, and inventory to stock all factor into how easy or difficult it is to bootstrap a new company. Keep in mind the non-financial resources you may possess from your current job or business; working with the resources you have will reduce your costs. The following three stories help illustrate this, starting with Andrew Cao of Motoza:
My business partner and I started Motoza, a digital marketing agency, back in 2011. We had no funding and bootstrapped it from the start of it; we put in about $200 each to fund our new venture.
It was tough in the beginning. Luckily, we worked from home, did not need staff, and did not need to purchase expensive physical equipment. We had some software already so the operational costs were at a minimum.
We had to dip into our savings for the first few months until we got a couple contracts signed to help bring in revenue. The cashflow was still not enough to cover full salaries, but at least we were making something by the end of our first year.
Next up, Ryan Snaadt of Snaadt Media Group:
I started my business in college with a $300 camera from Target â shooting small projects around campus. In less than 12 months, I made over $10,000. I then used the revenue to upgrade my gear, increase my production quality and price point â and grow my business.
The first few years were tough to overcome the ‘just a guy with a camera’ stigma. Then I started offering integrated marketing with the videos. Essentially shoot, edit, produce, and run the ads for clients on social media. This brought much more value to them and transcended the ‘guy with a camera’ stigma to reach more premium level clientele.
For a business today, there are many ‘lean’ ways to start up. Many times a service or consulting business can conduct their interactions over the internet and not require unnecessary overhead like office space, multiple employees, etc. In my world of marketing, it has never been easier to use free platforms like podcasting, YouTube, social media, and others to grow your audience and find more customers.
And from Julie Austin of Creative Innovation Group:
I’m an inventor and manufacturer of a product called swiggies, wrist water bottles for adults and kids. I literally started out with $5.00 and a clay prototype. No investors, no savings, and no experience in running a business, especially something as overwhelming as inventing and manufacturing a new product.
How difficult was it? Extremely! I worked 2 and 3 jobs for years to get patents, buy inventory, and get it off the ground.
How long did it take to become profitable? It took several years to show a profit. But I don’t think all businesses are this difficult to start with no money. It’s a very cash intensive startup.
Tip #3: Don’t Expect Immediate Windfalls
When you’re talking about starting a business without any money, you’re more likely looking at a slow ramp-up than instant gratification. Plan accordingly. While you may begin raking in money right away, your real payday may be months or even years away.
Neal Taparia of Solitaired shares some insights below:
It was very challenging to grow a business without financing. I lived off savings in the beginning, and paid myself just enough for living expenses for years. We became profitable 2.5 years into it, with the caveat I was paying myself minimally.
The biggest pro is it requires you to be disciplined. You count every dollar in and every dollar out, and you make sure everything is spent to best grow the business. If you have a bad hire, you won’t hesitate to make the necessary changes. On the flip side, it takes time. You don’t have outside capital to accelerate your growth. You have to be patient and disciplined to have the long game in mind.
Joan Igawa of Atomic Bullfrog Studios has this to say:
I am a small business owner and had started my t-shirt design business about 3 years ago. I did not use any type of money up front to start. I started on Merch by Amazon which requires no money to start an account, plus all the computers and design software I already had. The drawbacks to this was that it took a few months to start seeing any kind of profit, while toiling day and night creating, researching, and uploading designs. I had to learn how to strategically use keywords so customers could find my designs, as well as testing what was selling well, what was oversaturated, and what certain untapped niches had potential to become very profitable.
Tip #4: It Can Be A Good Way To Launch Companies That Investors Would Overlook
Don’t have a network of investors to hand you dump trucks full of treasure to start your company? That’s not always a bad thing. Investors are looking to win big on their investment, which means they can easily overlook niches that take time and love to develop, while ultimately generating a healthy income. From Meaghan Thomas of Pinch Spice Market:
My partner started our organic spice company, Pinch Spice Market, in 2011 with his former business partner. They started it with just their personal savings, and to this day it has never taken on a loan or received outside investment.
Personally financing the business was certainly the more difficult road to take, but it wasn’t without its perks. They were able to have full control over the product, which was really important to the founders. The company proudly sources spices fair and direct trade from certified organic farmers and co-ops around the world. It’s certainly not the cheapest way to acquire spices, but it is the most ethical way. (We also find it yields the highest quality spices too, as farmers don’t have to worry about living in poverty and can spend time tending to their organic crops, but that’s a whole different story.)
The bottom line with investors was we didn’t want to take on anyone who would just look at spreadsheets and decide it was cheaper to purchase lower quality spices from a standard spice conglomerate like the majority of our competitors do.
Tip #5: Take Advantage Of Free Platforms
The internet can be both a blessing and a curse for small businesses. On the one hand, it puts you in competition with people outside of your immediate geographic location. On the other, it offers you access to those other markets and often at little to no cost. Take advantage of platforms (such as Etsy, Amazon, etc.) to sell and market your products and services without spending too much money upfront. Below is a quote from Ryan Scribner of Scribner Media LLC and Investing Simple:
I have actually started two businesses with $0 in start up money. The first is my YouTube channel, which I started in 2016. The second is my blog, which I co-founded with my business partner in 2018. Since these are online businesses, it was obviously a lot easier to bootstrap it and start with nothing. In 2019, my YouTube channel surpassed $500,000 in revenue and the blog is on track to do around $150,000 in revenue in 2020. These businesses will bring in a combined $1,000,000 by 2021. It was not difficult to start these businesses without money. There was no inventory to purchase, and I simply utilized what I already had around me. I eventually upgraded equipment, but I simply reinvested my earnings back into improvements. To get started with a channel, all you really need is a camera and a computer. For a blog, just the computer will do. It is completely free to post your videos on YouTube or share blog articles on the internet.
Tip #6: Tap Unconventional Sources To Get Financing
You can work around not having much money, but there’s a good chance you’ll run into at least a cost or two early on. From benevolent relatives to personal loans, to crowdfunding platforms (such as Kickstarter), it’s possible to raise funds even if your accounts are empty. Just keep in mind that all of these unconventional sources come with their own drawbacks. You can strain relationships, accrue debt you can’t pay, or add overwhelming complexity or responsibilities to what otherwise would have been a simple business plan.
Note that this often goes against what conventional wisdom says is “the right way to start a business.” But you probably wouldn’t be doing this if you weren’t a risk-taker, would you? Just check out what Frank Chioda of Trivr Eats has to say on this:
We’ve bootstrapped the company so far: pouring our savings and resources into it and we’re very proud of it. I did something that I’m sure many people would advise against. At 29 years old, I emptied my 401(k). I pulled all $50,000 out and put everything into the business. It’s been incredibly difficult and costly, especially compared to many other startups that focus on OPM. Other People’s Money.
But I wouldn’t have it any other way. Savings, 401(k), it’s all just investments in different things and we decided that if we’re going to gamble on someone, I’d rather it be on us. We’ll find out soon enough whether we were right or not.
Tip #7: Be Prepared To Be A Jack-Of-All-Trades
While you may be able to outsource some work for favors or by offering sweat equity in your business to people who help you out, chances are you’re going to have to wear a lot of different hats as your business gets off the ground. You may not be an expert in web design, for example, but you still may have to design a functional one. You may not know much about finance, but you’re going to have to learn how to balance your budget. This isn’t a bad thing. While the salaried world tends to reward specialization, entrepreneurs benefit from a more generalized skill set. From Leigh Louey-Gung of Life Operating System:
I started LifeOS with no money from my bedroom and it forced me to have to learn how to do everything. I learned how to build websites, how to setup forums, how to write articles, how to develop coaching programs, how to do social media, and everything in between.
While it was a struggle and took far longer than it would have if I had money to hire skilled and experienced employees, the skills I learned through that process have put me in great stead to build my later companies and the experience of completing those tasks has given me the ability to hire staff more effectively as I now know what to look for.
Small Business Spotlight: LaTersa Blakely Enterprises, LLC
In 2009, administrative assistant LaTersa Blakely of Peachtree City, GA, realizing that all but $20 of her salary was paying for childcare, left her office job behind so that she could look after her children full time. With the need to stay home with her kids and no money to spend on a business venture, Blakely needed to get creative.
“I started my very first business in 2009, called LaTersa Diaper Cakes and, to be honest, I had no clue what I was doing,” says Blakely. “Because I still wanted to be able to contribute to the monthly household bills, I started selling my diaper cakes on eBay, Etsy, and craft shows. Because I started my business from my kitchen table and only purchased supplies as my orders came in, I was able to make a little money.”
Over time, Blakely sought additional sources of revenue for times when the sales of her diaper cakes were low. She now supplements her sales with digital products, such as ebooks, consulting, and courses. Ten years later, her business is thriving.
Blakely offers a few tips for people trying to bootstrap their businesses:
Start With Digital Products: “It will only cost you time and effort upfront which will lead to residual income over time. Some examples would be printables, eBooks, workbooks, and consultations.”
Offer Coaching Programs: “If you have knowledge that people are asking you constantly, you can package that and sell your knowledge. If you can solve someone’s problem, people will pay you to make their pain go away.”
Host Virtual Workshops: “Collaborate and build relationships with other entrepreneurs and have Summits, classes, workshops all from the comfort of
Get Creative: “When you are starting a business, you have to have more than a goal to make money because when you first start out, your money will not come in consistently. You have to have a BIGGER why than making money because if that’s your driving force, when you don’t see the money right away, you will give up. Start small and work your way up. The more creative you can get and keep your expenses low will help you build momentum while you’re building your business.”
Starting A Business With No Money: Have You Found Success?
Have you started your own business with no money? What obstacles and opportunities did you encounter? We’d love to hear about your experiences in the comments.
The post No Money? No Problem. How To Start A Small Business If You’re Short On Funds appeared first on Merchant Maverick.
Over the last decade, business owners and entrepreneurs have increasingly turned to crowdfunders to raise funds. Having access to individual donors for business projects and creative endeavors has been a needed boon to businesses in the post-financial-crisis era.
Two of the names that often come up in the crowdfunding conversation are Indiegogo and GoFundMe. In this article, we’re going to examine these two crowdfunding platforms and compare their suitability for business fundraising.
Indiegogo VS GoFundMe
When evaluating Indiegogo vs. GoFundMe as crowdfunders, consider that while Indiegogo is for funding tech projects and creative works, GoFundMe’s crowdfunding is primarily for personal causes (such as medical emergencies). However, it can be used for business crowdfunding in certain circumstances.
Crowdfunding for tech products and creative works
Can launch a Patreon-style ongoing crowdfunding campaign (InDemand) after you reach your initial funding goal
Good customer support
Does not prescreen campaigns
5% platform fee
Limited communication between campaigners and backers
Can’t launch an InDemand campaign without having run a successful “traditional” crowdfunding campaign first
When Indiegogo launched in 2008, it was intended to be a financing platform for independent films â hence the name. However, Indiegogo’s mission soon expanded, and the platform now supports crowdfunding campaigns for tech gadgets, household products, and all manners of creative works (films, novels, music, podcast, tabletop games, and more).
While this article focuses on business crowdfunding, I should note that Indiegogo also permits fundraising campaigns for nonprofit organizations, though it disallows campaigns for personal causes and directs such campaigners to GoFundMe. Campaigns for nonprofit organizations are not subject to Indiegogo’s 5% platform fee.
If your crowdfunding campaign hits its funding goal, you then have the option of using Indiegogo’s InDemand service to crowdfund continuously (Ã Â la Patreon). InDemand lets you continue raising money for an indefinite period â and without fixed fundraising goals â after your initial campaign closes. Your initial campaign need not have been with Indiegogo â if your campaign was successful on Kickstarter or another service, you are still eligible to use InDemand. The one requirement is that your first campaign was successful in meeting its goals.
With Indiegogo campaigns, the platform takes a 5% fee from what you raise. This is typical of for-profit crowdfunding platforms.
GoFundMe is the world’s largest crowdfunder for personal causes and emergencies
No platform fee
You can keep your campaign open for an unlimited period
GoFundMe isn’t for most business projects
Some campaigners have trouble withdrawing funds
The platform doesn’t make it easy to offer rewards
Compared to Indiegogo, GoFundMe is a very different type of service. GoFundMe is used to campaign for funds to cover personal hardships, emergencies, and other compassionate causes. As such, GoFundMe no longer carries a platform fee, as the company decided that taking a cut from the crowdfunding campaigns of people in desperate situations was not a good look.
Here’s what you need to know: GoFundMe isn’t set up to be a business crowdfunder. GoFundMe’s brand is inextricably linked to charity, personal needs, and community support. While GoFundMe doesn’t disallow crowdfunding for business, the platform simply isn’t set up to support the sort of gadget-makers and podcasters that Indiegogo supports. Business campaigns without a compassionate component or social purpose may not succeed on GoFundMe and are likely to provoke the ire of people who see such campaigns as taking advantage of a platform intended for altruism and justice, not profit.
However, this is not to say that GoFundMe is never right for business crowdfunding. To get a sense of the circumstances that make a business crowdfunding campaign on GoFundMe appropriate, check out GoFundMe’s business fundraiser page and examine the campaigns that are succeeding. You’ll see lots of campaigns for local businesses struggling to recover from coronavirus-related hardship, riot damage, and other extenuating circumstances. You’ll also see campaigns from struggling longtime businesses seen as pillars of their respective communities, such as independent bookstores and theaters. Other GoFundMe business campaigns either highlight the personal challenges of the business owner or the socially-conscious purpose of the business â a store run by a veteran recovering from PTSD or a cafe devoted to hiring the formerly incarcerated would jibe with GoFundMe’s mission.
However, if you’re trying to raise money to create a video game or independent film, for example, and your campaign doesn’t have a social justice angle or a story of personal struggle, Indiegogo is the crowdfunder you’ll want to go with.
While Indiegogo and GoFundMe have divergent missions and are geared towards different kinds of crowdfunding campaigns, neither platform is very restrictive as to the kinds of projects that can start a campaign. Indiegogo explicitly allows five different types of crowdfunding campaigns:
Campaigns benefitting nonprofit organizations or nonprofit beneficiaries
Campaigns for products
Anything within “Community Projects” that is not a personal cause
Educational campaigns in the Tech and Innovation category
GoFundMe does not have strict guidelines as to who is allowed to use the platform, though the company states the following in its fundraising FAQ page:
We see people use GoFundMe to raise money for themselves, friends and family, or even complete strangers in random acts of kindness. People raise money for just about everything, includingÂ medical expenses,Â education costs,Â volunteer programs,Â youth sports,Â funerals & memorials,Â and evenÂ animals & pets.
Terms & Fees
Indiegogo’s terms and fees are pretty straightforward:
Your campaign can last up to 60 days
Indiegogo’s platform fee is 5%
The payment processing fee varies by country but is 2.9% + $0.30 in the US
An Indiegogo InDemand campaign has no duration limits, but the fees are the same.
As for GoFundMe, the terms and fees are thus:
Your campaign can last for however long you want it to last
GoFundMe does not charge a platform fee
The payment processing fee varies by country but is 2.9% + $0.30 in the US
The Campaign Process
The campaign process is quite similar for both of these crowdfunding platforms. While your campaign is open, you give people the option of contributing to your campaign on your project page. Both Indiegogo and GoFundMe provide you with access to promotional tools to bolster your campaign, and both platforms encourage you to use your existing social media channels to solicit support.
One aspect of running a campaign that differs between the two platforms is that with Indiegogo, the platform makes it easy to offer perks to your backers (such as a product, branded merchandise, tickets to a showing of your film, etc.) in exchange for a certain level of financial support. With GoFundMe, while you can offer rewards to your donors, you have to contact the donor and offer a reward yourself with no automated process to facilitate reward-giving.
Customer Service & Technical Support
Indiegogo offers an extensive help section to answer any questions you might have. For direct support, there’s a contact form you can use to get in touch with the company. There’s no live chat option, nor is there any phone support.
GoFundMe also offers a Help Center for support along with a contact form for questions. GoFundMe also provides live chat support from Saturday to Wednesday, 6 AM to 7 PM Pacific Time, though the company warns that “These hours are subject to change based on how many agents we have available.” Like Indiegogo, GoFundMe does not offer phone support.
Reviews, Criticisms, & Complaints
Both companies receive a high volume of complaints, which isn’t out of the ordinary for such widely-used services.
With Indiegogo, most reviewers have been largely positive about the company, and many campaigners have found the platform to be intuitive and flexible. Reviewers are also generally positive about Indiegogo’s customer support. Most Indiegogo complaints stem from miffed backers who never receive their promised rewards from failed and/or unscrupulous campaigns. Due to this, Indiegogo campaigners would be well-advised to advertise their responsibility and trustworthiness to reassure potential supporters.
While GoFundMe has its satisfied users as well, the company gets an even higher volume of complaints than does Indiegogo, many of which have to do with campaigners being unable to withdraw funds that were pledged to their campaigns. While GoFundMe campaigns are not pre-vetted, the company does closely examine campaigns before allowing the campaigner to withdraw funds, and sadly, this process catches a lot of needy folks at the worst possible time, resulting in a high volume of complaints. GoFundMe’s policy of requiring campaigners to give their full SSN before withdrawing funds comes in for a lot of criticism too.
Which Is Best For Your Crowdfunding Needs?
Generally, if you intend to crowdfund for a business project, the Indiegogo vs. GoFundMe question is pretty clear, considering Indiegogo is geared towards business projects while GoFundMe, for the most part, is not. However, there are some exceptions to this general rule.
Choose Indiegogo Ifâ¦
You’re crowdfunding to bring a consumer product to market
You’re crowdfunding for a creative project, such as a movie or book or podcast
You’ve already run a successful crowdfunding campaign, and you now want to raise funds continuously
Choose GoFundMe Ifâ¦
You run a business that has been impacted by a disaster or personal misfortune
You run a struggling business that is recognized as important to your community
Your business has a charitable/socially-conscious mission
The post Indiegogo VS GoFundMe: Which Is Right For Your Next Crowdfunding Campaign? appeared first on Merchant Maverick.
Crowdfunding has risen in prominence over the past decade to become a major source of business financing for companies and entrepreneurs around the world. However, while services such as Kickstarter and Patreon garner the lion’s share of attention, there’s another type of crowdfunding available â one that applies crowdfunding principles to traditional forms of lending. This hybrid method of raising capital is becoming known as debt crowdfunding.
Perhaps you’re already considering debt crowdfunding as an option for your business, startup, or creative project, or you’re simply curious about the concept. Either way, it’s important to understand what debt crowdfunding is, how it differs from other forms of crowdfunding, and how you can use it to raise funds for your business.
What Is Debt Crowdfunding?
Debt crowdfunding is sometimes referred to as “peer-to-peer (P2P) lending” and “crowdlending,” as it combines the concepts of crowdfunding and lending. A crowdfunded loan works similarly to a traditional business loan from a bank or other lending institution in that money is sent to the borrower by a lending institution. In exchange, the borrower repays the loan with interest over a specified period.
However, there are some key differences between traditional loans and crowdfunded loans. With the latter, your borrowed funds are disbursed by a debt crowdfunding platform, not a bank or other financial institution. And while the crowdfunding platform sends you the funds, the money comes from individual investors who pledge to provide a portion of your loan funds. When you repay the crowdfunding site with interest, the funds are then distributed back to the individual investors.
Considering how difficult it has become to qualify for a bank loan since the financial collapse of 2008, it’s little wonder that businesses have been turning to debt crowdfunding in greater numbers. Debt crowdfunding allows you to market your funding campaign to individual investors rather than relying on the hope that a large, opaque institution finds your business worthy of support.
How Debt Crowdfunding Works
With debt crowdfunding, potential borrowers submit a loan proposal to a crowdlending website. The platform assesses your proposal to judge its suitability. If your application is approved, the platform then offers you rates and fees that correlate with the degree of risk your loan poses to potential investors. The riskier the investment, the more money the peer lenders will want in return, leading to higher interest rates for your loan.
As we explain in our piece on P2P lenders, the primary advantages of P2P loans over traditional business loans provided by a bank or credit union are thus:
Application Process Is Simpler & More Convenient:Â Unlike a bank loan, which typically involves a lengthy application process and may require such things as business visits, debt crowdfunders let you apply online, usually without requiring even a phone conversation.
Quicker Approval & Funding:Â Ordinary small business term loans take much longer to get funded than the average P2P loan, making debt crowdfunding a good funding option for businesses needing funding relatively quickly.
While operating on the same basic principles, debt crowdfunding sites vary greatly in terms of the types of businesses to which they cater. For instance, Funding Circle lends to small businesses with at least two years of business history, while StreetShares requires less time in business and has a particular focus on veteran-owned business. Meanwhile, Kiva US is devoted to startups with no business history at all and offers loans with no interest whatsoever, but it has a lengthy application process and a long wait to get funded (one to three months). Point being, no two P2P lenders are the same, so do your due diligence before applying for a crowdfunded loan.
Check out our explainer article on debt crowdfunding for an in-depth analysis.
Debt VS Equity Crowdfunding
Equity crowdfunding bears considerable resemblance to debt crowdfunding. Both types of fundraising involve the solicitation of investments in the security of your business. The difference is that a P2P loan is just that â a loan. You pay the lender back on a fixed schedule with interest, and that’s that.
With equity crowdfunding, the investor receives an ownership stake in your business. This sort of fundraising was only recently legalized when the JOBS Act was signed into law in 2012 (the provisions took some time to go into effect). It legalized the advertising and solicitation of securities, thereby allowing businesses to launch equity crowdfunding campaigns.
Investors seeking hot equity investments often look for early-stage ventures with exponential growth potential to get in on the next big thing. Debt investors, on the other hand, simply expect to be paid back plus interest. For this reason, debt crowdfunding is a viable option for a greater proportion of small businesses out there than equity crowdfunding. To plenty of small business owners, this is probably just as well, considering debt crowdfunding doesn’t require you to relinquish any control over your business and forfeit a portion of all your future profits.
Debt VS Rewards Crowdfunding
Rewards crowdfunding Ã la Kickstarter, Indiegogo, and Patreon is a beast of a different nature. Legally, rewards crowdfunding isn’t investing, so it’s not regulated as such, making it a less complicated and more straightforward prospect overall.
With rewards crowdfunding, you invite backers to contribute financially to your venture, and in exchange, you offer them rewards. A reward could be a prototype of a new consumer product you’re manufacturing, tickets to a viewing of your film, access to exclusive episodes of your podcast, etc. It’s a way to get your potential customer base excited about contributing to your success.
Since it doesn’t entail you taking on debt, rewards crowdfunding looks pretty good as an alternative to a loan. However, keep in mind that with rewards crowdfunding, your ability to raise funds is dependent on your ability to make your funding campaign go viral. It’s a very competitive arena, and in some cases, you’ll be competing for attention with campaigns backed by crowdfunding agencies. What’s more, funding is anything but rapid â your typical rewards crowdfunding campaign is open for 30-60 days. (Patreon-style ongoing campaigns are different, as you’re essentially selling subscriptions.) And with Kickstarter, in particular, if you don’t meet your funding goal within the time frame you initially set, you don’t get any of the funds pledged to you â it’s all or nothing.
For the right kind of business venture, rewards crowdfunding can work swimmingly while keeping you out of debt. Just know that it isn’t well-suited to many types of small businesses, requires thoughtful promotion, and is not quick.
When Debt Crowdfunding Is The Right Choice For Your Business
Making debt crowdfunding work for your small business requires that you have a) a defined need for money, b) a strategy for what to do with it, and c) a plan to pay it back. Compared to other forms of crowdfunding, debt crowdfunding is both likelier to succeed and (generally) a swifter method of funding. Furthermore, you’ll probably get more flexible terms and a lower interest rate on a P2P loan than you would with a bank loan (along with an easier application process and a quicker time to funding).
If you’ve got a great working relationship with your bank, you might consider trying to get a loan from them instead. And if you’re involved in an exciting project or cause with lots of potential for viral success, one of the sexier forms of crowdfunding might ultimately prove more lucrative for your business. However, that still leaves a wide swath of small businesses that stand to benefit from debt crowdfunding.
For more information on debt crowdfunding and how it compares to rewards- and equity-based crowdfunding, check out our article on the different types of business crowdfunding.
Not The Right Fit? Your Best Alternatives
Let’s look at some other funding alternatives and see how they measure up with P2P loans.
Don’t have enough business history to qualify for a crowdfunded business loan? Consider a personal loan instead.
With good credit, you may be eligible for a lower interest rate with a personal loan than with a business loan. However, borrowing amounts tend to be smaller, too. Still, if you need fast financing for business expenses, personal loans are definitely an option you should consider.
If you like this idea, check out our piece, How To Get A Personal Loan For Your Business.
Business Credit Cards
If you have a good credit score, a business credit card is probably the easiest way to secure business funding. Business credit cards give you access to a revolving line of credit to use on business expenses.
Just as with most P2P lenders, business credit card issuers report your payments to the credit bureaus, thus building your business credit. This may increase the odds that you’ll qualify for business loans in the future.
In terms of convenience, there are few easier funding options than business credit cards. And unlike P2P loans, using a business credit card can earn you rewards or cash back. Just keep in mind that you might pay a higher APR with a business credit card than with a P2P loan.
Interested? Check out The Best Business Credit Cards for the rundown on your best options.
Merchant Cash Advances
Let’s say your poor credit score and/or lack of business history make you unable to qualify for either a loan or a business credit card. You may still be able to get a merchant cash advance, which is a sales agreement that will have you selling your future revenue at a discount to a merchant cash advance company.
A merchant cash advance should not be an option of first resort, as the fees are very high, and the repayment periods are quite short. An MCA can easily send you into a debt spiral if you’re not prepared to handle it. However, if your business is capable of generating the revenue necessary to pay it back, an MCA might be just the thing to keep your business going.
Read our piece on merchant cash advances for more information.
Final Thoughts On Debt Crowdfunding
Debt crowdfunding has become increasingly prevalent in a world where bank loans are harder than ever to come by. If you think a P2P loan makes sense for your business, do your due diligence and compare your available options.
If you’ve ever taken out a crowdfunded loan, drop us a comment and let us know about your experience!
The post What Is Debt Crowdfunding & When Is It The Right Choice For My Small Business? appeared first on Merchant Maverick.
The recession sparked by the coronavirus pandemic has caused brutal financial damage to many small businesses throughout the US.
Some of those affected have been able to apply for federal funds, but often the aid hasn’t been enough. In many other cases, business owners have been outright denied. Such problems have led many small businesses to search for spare cash from alternative streams.
One of the more popular sources for extra money has been the crowdfunding site GoFundMe, which began picking up traffic in early March as shutdowns loomed across the country. By the end of that month, the site had raked in $120 million in donations for pandemic-related campaigns, according to a Bloomberg report. That was the most the website had ever pulled in for a single crisis — beating out aid for Australian wildfires by five times.
Despite the initial gold rush, is GoFundMe truly a wish-granting fairy for down-on-their-luck businesses? Should businesses impacted by the coronavirus pin their financial hope on a crowdfunded campaign?
Let’s take a look at how the service has — and hasn’t — helped small businesses throughout the COVID-19 crisis.
GoFundMe Promises Plentiful Hope For Some
Based on GoFundMe’s own numbers, the site houses over 16,000 fundraisers dedicated to helping small businesses weather COVID-19. Some of the campaigns are intended to be general relief funds for small businesses within specific regions or cities. Apart from those general aid funds, most are set up by owners of single businesses, usually to provide support for staff while the business is shuttered during the pandemic.
These campaigns have been a boon for some downtrodden businesses.
For instance, San Francisco’s beloved City Lights bookstore has raised almost $500,000 via donations from 10,300 people since April 9. This number exceeds the store’s $300,000 goal by astonishing margins.
“What? Over nine thousand people — impossible!” City Lights founder Lawrence Ferlinghetti said via a written update. “Wonderful! We want to open again as soon as we can. We donât want to disappoint them.”
Ferlinghetti got his wish. In June, SFGate reported that the bookstore, the spiritual home for Bay Area Beat poets for 67 years and counting, was able to reopen after the pandemic had potentially shut it down for good.
Elsewhere, La Bonbonniere, a neighborhood restaurant in New York City, has managed to reach its $50,000 goal. The campaign was helped hugely by a neighboring magazine stand, which shared La Bonbonniere’s GoFundMe on its Instagram — generating $15,000 in donations overnight, according to Vogue.
In Charlotte, N.C., Vietnamese restaurant Lang Van doubled its $30,000 goal after patrons stepped up to help the eatery avoid closure. Per the local NBC affiliate, the restaurant’s owners had been working for free while paying staff out-of-pocket — the donations were able to help alleviate the strain.
All told, it’s hard to argue that for some small businesses, GoFundMe can be a place to pick up a much-needed buck or two. However, the odds don’t favor many.
Only 33% Reach Their GoFundMe Goals
In terms of the most bountiful returns, we counted 45 small business relief campaigns that have broken the $100,000 barrier, while another 78 have passed the $50,000 threshold. When combined, those 123 campaigns have raised roughly $16 million for businesses around the globe.
However, when you consider that those 123 campaigns comprise just 0.7% of the total COVID-19 small business relief fundraisers active on GoFundMe, the picture looks rather bleak.
In fact, based on Merchant Maverick’s analysis of GoFundMe’s 468 most prominently listed campaigns for small business relief, only 33% of COVID-19-related small business campaigns have reached their goal (as of July 15). This number is reflective of the overall number of GoFundMe campaigns that have reached their goals historically; a University of Rochester study from earlier this year found that just 27% of campaigns on the site are successful.
There’s also another problem: Not all GoFundMe campaigns make use of donated money honestly.
A prime example occurred within New York City’s Brooklyn borough. The staff of the Jack the Horse Tavern accused the owners of misusing thousands of dollars in GoFundMe donations. One former employee told Eater that staffers were “basically being used as pawnsâ while the tavern’s owners collected donations in a campaign advertised “to help the staff.”
On top of these qualms, GoFundMe struggled to get donated money to businesses during the pandemic’s early stages. For example, the San Francisco Business Times reported the story of Missing Link Bicycle Co-Op, located in Berkley, Calif. After raising over $28,000 in donations via GoFundMe in April, the bike shop was only able to withdraw about $3,000 of the raised funds within two weeks.
Sam Wilson, the organizer of Missing Link’s campaign, told the Business Times that their hope that the “fundraiser would be an immediate cash infusion to help us scrape by has turned out to not quite be the case.” Similar stories can be found elsewhere; an article by Eater highlights several restaurants in Boston and Miami that experienced similar problems withdrawing funds.
Berkleyside, a publication that ran a story about other Berkley businesses with trouble accessing funds, received this emailed statement from GoFundMe: “Our top priority is to balance speed and safety in order to ensure funds arrive as quickly as possible into the hands of those in need. We continue to listen to our community and look at ways we can improve with new resources, product features, and services to alleviate stress and make fundraising more efficient during this difficult time.”
How Crowdfunding Can Help Your Business
Despite the potential negatives to GoFundMe, the platform still provides an excellent opportunity for small businesses to raise financial aid. But when considering GoFundMe for a campaign, it’s important for small businesses to maintain a realistic outlook.
While most businesses won’t be able to generate big bucks through GoFundMe, plenty may be able to at least generate some level of cash. These funds can help your laid-off employees, keep your lights on, or even provide a temporary boost for your family.
Since GoFundMe doesn’t require fees upfront (instead, the site claims 3% of the donated proceeds), it certainly doesn’t hurt it to start a campaign if your business is truly strapped for cash. For in-depth tips on how you can use GoFundMe for your business, visit Merchant Maverick’s guide to setting up a GoFundMe campaign.
If you want to know what other crowdfunding options are out there for your small business, check out our top 10 alternatives to GoFundMe.
Do you have a story idea, tip, or press release for the Merchant Maverick news team? Shoot us an email: [email protected].
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You have a great idea, and you’re ready to take action and turn that idea into a thriving business. Maybe you have a new product that’s unlike anything on the market, or you’ve hashed out the details of a much-needed business in your area. No matter what type of business you have in mind, all startups have one thing in common: the need for capital.
Unfortunately, new businesses find it challenging to find funding. You can’t just walk into your local bank, produce a few financial statements, and get a business loan. A lack of revenue and business credit history works against you, as traditional lenders see you as a big risk.
However, this doesn’t mean you have to put your dreams on hold. It simply means that you need to get a little creative with your funding. Not sure where to start? You’re in the right place. This post is going to focus on startup funding.
This goes beyond just small business loans. We’ll look at a few unique types of funding for your business, as well as provide you with tips to get started. Use these ideas to get the money you need to get your business off the ground. Ready to get started? Let’s dive right in.
Use Startup Funding To Take Your New Business To The Next Level
Before we delve into the different types of funding, let’s first evaluate why you need startup funding for your business.
Every business needs capital. The amount of capital you need varies based on a number of factors. Your type of business, specifically, influences your costs. If you’re creating a new product, your initial startup costs will differ from those of someone opening a store or restaurant. An online business will have different costs than a brick-and-mortar business. One of the first steps to launching your startup is to identify potential costs and then estimate how much capital you need to cover the costs to get your business off the ground.
When launching your business, some of the startup costs to keep in mind include:
Rent or mortgage
Supplies & inventory
Research & development
Securing capital is the first step to launching a successful business. Just take a look at some of the businesses and products you may already be familiar with. The wildly successful card game Exploding Kittens had one of the biggest Kickstarter campaigns in history, raising over $8.7 million in 2015. Since its launch, its become a top-selling game across retailers such as Amazon and Target with over 9 million games sold. Expansion packs and other card games are also available, making this business even more successful.
Or perhaps you’ve heard of the food delivery service Grubhub. By 2011, the company had received five rounds of investment funding, transforming the company from one that simply offered online restaurant menus to a food delivery service in cities across the nation. Grubhub was just sold to Dutch company Just Eat Takeaway.com for a cool $7.3 billion.
Maybe you want to grow your business this large … or maybe you just want to kick your 9-to-5 to the curb, make your own money, and be your own boss. Whatever your ultimate goal is, securing funds can help you get there.
How Does Startup Funding Work?
There are two main types of startup funding to consider: debt financing and equity financing. There are a number of funding sources that fall under each umbrella, but for now, let’s focus on the general meaning of each.
Debt financing means that you receive a lump sum of money that is paid back over a period of time. In addition to paying the principal (in other words, what you borrowed), you’ll also pay interest to the lender. You may also be required to pay fees, such as an application fee or origination fee.
Lenders look at several things when determining whether you qualify for funding, the amount you qualify for, and the rates and terms. This may include your personal and/or business credit history, revenue or personal income, and personal or professional references.
There are several types of debt financing to fund your startup, including:
Loans: You receive a lump sum of cash that is paid back over a period of time (anywhere from a few months to 20+ years).
Business Credit Cards: A business credit card works like a personal card. You’re assigned a credit limit by the lender. You can use your card as often as needed provided you haven’t hit your credit limit. Interest is charged only on borrowed funds. As you pay down your balance, funds are once again available to borrow.
Lines Of Credit: Lines of credit are similar to credit cards. A lender approves you for a set amount, which can be used as needed. Interest is charged only on borrowed funds. As you repay your line of credit, funds may become available to use again.
Debt financing has its benefits. Paying back your lender helps build your credit so you can qualify for higher limits and lower rates in the future. Your lender also doesn’t have a stake in your business, so you retain ownership.
On the other side of the coin, there are a few drawbacks to consider. Interest rates and terms — particularly for startups — may be less-than-favorable. If your business doesn’t succeed or you’re otherwise unable to repay your loan as agreed, your credit score will plummet. Your business and/or personal assets may also be at risk if you put up collateral, signed a personal guarantee, or have a blanket lien attached to your loan.
You can also get startup capital through equity financing. Like debt financing, you receive capital to use for startup costs. However, equity financing is different in that you don’t have to repay the funds. Instead, your investor receives a stake in your business in exchange for this capital. In the reality TV series, “Shark Tank,” the sharks invest money in products in exchange for ownership in the company — this is classic equity financing.
The good news is that you won’t have to repay funds, even if your business isn’t a success. The bad news is that you do have to give up partial ownership of your business. Not only does this mean that you have to share the profits, but you may also have to consult with stakeholders before making big decisions, such as making a large purchase or expanding your business.
5 Ways To Get Funding For Your Startup
There are a few ways to get funding for your startup. You may even opt to try several different methods to get the capital you need. Read on to learn more about getting funds for your startup.
Think about a seed. It starts off small. But over time, that seed grows into a plant or tree. Now, think of this seed as your business. The seed money — money given by investors — helps start your business. Over time, your goal is to grow this seed (the investment) into a thriving business.
Because this is a type of equity financing, your investors have a stake in your business in exchange for their seed money. Once your business has grown, the investors may opt to sell their stakes and move on to another opportunity. They may sell it back to you or to other investors that are interested in being a part of your business.
Access To More Capital:Â The sky is the limit when it comes to seed funding. Unlike loans and other more traditional forms of funding, you don’t have to worry about limitations being put on the amount of funding you receive — provided, of course, that you find the right investor.
Requirements:Â No business credit history? Low personal credit score? No revenue from your business? No problem. While some investors may have their own requirements before investing their funds, many are simply looking for the next big idea that has a potential for profit.
No Regular Payments: You won’t have to worry about making regularly scheduled payments and high interest rates and fees when scoring seed funding from investors.
Additional Skills & Knowledge:Â It’s highly likely that your investor will at least have some experience with your industry and can provide valuable skills and knowledge to help you grow your business to its full potential.
Giving Up Part Of Your Business:Â In exchange for funding, your investor will take a percentage of your business. This means that they have a right to some of your profits and, depending on their level of involvement, may be involved in making major business decisions.
Finding An Investor: Finding an investor that is willing to invest in your product/business (and, ultimately, you) can be a challenge. Other sources of funding may be acquired in just a few days…finding an investor can take weeks, months, or even longer.
The internet has changed business funding for the better in many ways. One way is through crowdfunding. You most likely have heard of (or maybe even donated to) campaigns on sites like Kickstarter or GoFundMe. These crowdfunding platforms have opened up financial opportunities for many startup businesses, and yours could be next.
There are two main types of crowdfunding to consider: equity-based and rewards-based. Equity-based crowdfunding means that investors get a stake in your business in exchange for their financial contributions. Rewards-based crowdfunding provides each investor with a reward or perk — think, first dibs on a new product or a deeply discounted price at launch.
Few Limitations:Â You won’t encounter maximum funding limits like you would with loans or traditional financing. Although some crowdfunding platforms do have limitations in place, ultimately you can find a platform that lets you raise as much capital as you need — no matter how much that is.
Keep Your Equity:Â If you opt to run a rewards-based campaign, you don’t have to give up ownership in your business.
Tests & Builds Your Market:Â In addition to drawing in interested investors, you’re also putting your name out there to others — even those that don’t contribute — to begin building interest in your business before you even launch.
Requires A Lot Of Work:Â Crowdfunding isn’t as simple as starting a campaign and waiting for the money to roll in. Instead, you will need to promote your campaign through social media, email, your website, or through other means in order to successfully raise funds for your business.
May Not Be Successful:Â Sure, you didn’t raise all the money you needed, but you raised some, so that’s okay, right? It depends on what platform you used. Some platforms require you to meet your goal in a set period of time in order to receive your funds. If you fall short, you’re back at square one.
Negotiate With Suppliers
Another way to get your startup off the ground is to negotiate with suppliers. If you need supplies to create a product or open your business, negotiating is a smart tactic you need to master.
First, start by estimating supply costs. Get quotes from suppliers, do your research, and understand what costs are associated with your supplies. Next, find reputable suppliers and begin negotiations. If their pricing is too high, for example, use the data from your research to get a better deal. You can also inquire about discounts — i.e., for bulk or recurring orders.
Next, consider the payment terms. If payment is due immediately, try to negotiate net-30 terms; in other words, your payment will be due in 30 days. If the supplier isn’t willing to extend terms this much, even net-10 or net-5 terms can be helpful as you try to secure financing, sell products, or find an investor. Some suppliers may even offer in-house credit programs that are easier to qualify for than bank loans or credit cards.
Lenient Requirements: As a startup with no business credit or revenue, proving your creditworthiness is pretty much impossible. But when you work directly with a supplier to get a reduced cost or improved repayment terms, these requirements may not even be a consideration.
Building Business Relationships: As you build relationships with your suppliers, it’s possible that you may get additional discounts, better terms, and other perks in the future.
Doesn’t Always Work: Getting a supplier to come down on the price of products or offer longer repayment terms isn’t guaranteed. Any savings or credit options and the requirements that come with vary by supplier.
Other Funding May Still Be Needed: Even if you get the cost of your supplies negotiated to a more reasonable rate or score longer terms, you’ll still need capital to pay the supplier. If you launch your business and start making cash, great! If not, you may be required to find some form of financing in order to pay for your supplies.
We can’t talk about funding your business without at least mentioning loans. Of course, obtaining a loan through traditional lenders may be difficult, but it isn’t impossible. The Small Business Administration (SBA) offers funding programs for small businesses, including startups and underserved communities. There are also a number of alternative lenders that may be able to help you now or just a few months after you begin bringing in revenue.
Another option to consider outside of small business loans is a personal loan. If you have steady income and a solid personal credit profile, you may be eligible for a personal loan to use toward startup expenses — a loan with longer terms and lower rates than you’ll find with many alternative lenders.
No Hard Work Required: Getting a small business or personal loan is as simple as submitting an application with requested documentation. Lending marketplaces make it easier than ever to compare rates and terms by filling out just one application.
Keep Your Equity: When you receive a loan, you don’t have to give up ownership in your company.
Can Be Expensive: Depending on the lender you select and criteria such as your credit score and income, the interest rates and fees of loans can get pretty expensive.
May Require Collateral: Many lenders require risky borrowers (including startups) to put up collateral for a loan. This could be a specific business asset or personal asset. Some lenders use blanket liens, which covers everything owned by your business. Failure to pay your loan as agreed could result in losing these assets — and putting your business underwater.
Requirements Not Met: Your application may be rejected if you don’t meet the requirements of the lender, which may include business credit score and history, personal credit profile, time in business, revenue, personal income, or type of industry.
Small Business Grants
If you have an innovative business idea, you may qualify for a startup grant. Not only can you score the capital you need with a grant, but funds don’t have to be repaid. However, don’t just think that grants are an easy way to get free money. Most small business grants have pretty strict requirements, so finding ones you qualify to receive is difficult. Once you find grants that are a good fit, competition is pretty stiff — so be prepared.
Startup grants are available for tech companies, innovative new products, and even underserved communities like minority-owned businesses. In addition to submitting information about yourself and your business or product, you may also be required to create a video, write an essay, submit a business plan, or complete other steps before being considered for a grant.
Grants Don’t Have To Be Repaid: You don’t have to worry about repaying a lender if you receive a small business grant. If you qualify and are awarded a grant, funds do not have to repaid.
Not Just Monetary Awards: Depending on the grant that you’re awarded, money isn’t the only thing you’ll receive. Many grants also include access to resources, such as industry-specific workshops, training, and mentorships.
Finding Grants Can Be Difficult: Most grants have requirements that your business may not meet. You also have to keep an eye out for application deadlines to ensure your application is received on time.
Competition Is Tough: You aren’t the only aspiring business owner to seek out grants. Competition is tough, and most people that apply won’t receive a grant, so make sure you have a backup plan in place.
On a farm, an incubator is used to create the perfect environment for the successful hatching of eggs. In business, a startup incubator works in a similar way — metaphorically, of course.
A startup incubator is a program designed to foster the growth of new businesses. An incubator provides a number of resources to help startups grow into a successful business. A single company or organization may act as a startup incubator, but more commonly a number of businesses and organizations come together to provide the resources startups need to succeed.
These programs don’t just open up new opportunities for capital but also may provide your startup with resources including mentorships, office space, and training to ensure your business starts on the right path.
Looking for a startup incubator? Start your search online or contact your local SBA office.
More Than Just Funding: Your business needs funding, and a startup incubator can give you opportunities you couldn’t find on your own. In addition to just capital, though, you can also take advantage of the numerous resources and expertise offered through these programs.
Find Your Focus: The benefits you’ll receive from a startup incubator can help you become more structured and focused on launching and growing your business.
Finding & Being Accepted To A Program: Unfortunately, startup incubators won’t just flock to you. It’s your job to do the research and find incubator programs, learn more about joining, and ensuring you meet all requirements. Once you do find suitable programs, actually being accepted over competing startups is another challenge.
Requires Commitment: Your program may require you to attend training, workshops, or meetings with investors or mentors. This time commitment may prove to be too much if you have other obligations, such as a full-time job.
Tips To Get The Startup Funding You Need
Once you’ve determined the method (or methods) you’ll use to acquire your startup funding, there are a few things you can do now to improve your odds for success. Before reaching out to that lender, investor, or supplier, keep these tips in mind.
Understand The 5 Cs Of Credit
Whether you plan to apply for a business loan now or in the future, it’s important to understand what lenders look for — specifically, the five Cs of credit. Those are:
Character: Lenders want to work with borrowers with good character traits. This may include personal work experience, industry experience, and personal credit history.
Conditions: Are the conditions favorable for lending? Lenders will consider this, looking at things such as industry trends, the state of the economy, and even pending legislation to determine if lending to your business is a smart move.
Collateral: Do you have collateral to secure your loan in the event that you default on your loan agreement? Equipment, real estate, and even accounts receiveable can be used as collateral.
Capital: Have you invested in your business? If so, you have skin in the game and will have something to lose if your business goes under. Lenders will consider how much capital has been invested in your business when determining if you qualify for funding.
Capacity: Does your business have the capacity to take on a loan payment? Lenders will consider factors such as your debt-to-income ratio (DTI), debt service coverage ratio (DSCR), and cash flow to determine if your business is financially prepared to take on additional debt.
Is your business falling short in one of these areas? Learn more about the 5 Cs of credit and how you can make sure your startup is prepared before approaching a lender.
Create A Business Plan
You have your business ideas in your head and maybe even jotted down in a notebook somewhere, but it’s important to have an actual business plan. Not only is this essential for drawing in investors or securing funding, but it also serves as a blueprint for your business. Think of your business plan as a road map, outlining the details of where you’re going (your goal) and how you will get there.
Since every business (and the goals of each business owner) is different, no two business plans are the same. However, there are a few common sections that each business plan shares. These include:
Products & Services
For some businesses, a one-page business plan may be sufficient. For others, however, a more comprehensive plan may be needed, particularly if you’re looking for investors or to obtain a small business loan.
Evaluate The Cost Of Borrowing
It may be tempting to jump on the first funding offer that comes your way, but it’s important to stop and weigh out the cost of funding.
For instance, if you get approved for a startup loan, look at factors such as fees and interest. Calculate how much you’ll pay to borrow funds, and determine if this is feasible or if it could potentially sink your business.
If you have an interested investor that wants equity in exchange for capital, consider how much of your business you have to give up. Are the funds you’ll receive today worth giving up a large portion of your profits in the future? Look at the cost of borrowing over the long-term to determine if you need to find another source of funding.
Don’t Be Afraid To Get Creative
When it comes to starting (and growing) a business, acquiring funding takes some creativity. Maybe you’ll use one (or more) of the methods suggested in this post to fund your startup. Or maybe you’ll do something else entirely. The key is to find what works best for you.
Don’t be afraid to get creative. Tap your friends and family that could be potential investors. Attend industry events and network with like-minded entrepreneurs. Keep an open mind, be flexible, and have a backup plan in place in the event that your
Hold Up Your End Of The Bargain
Once you do get funding, your work doesn’t stop there. Whether you agree to repay a lender each month or you’re using a supplier for recurring purchases, make sure that you always keep your promises (whether they’re on paper or not). Word travels fast among the small business community, and the last thing you want to do is burn your bridges. Repay your debts as agreed, hold up your end of every deal you make, and build a reputation as a business owner with integrity and strong character.
An added bonus? Paying your debts on time helps raise your credit score, making it easier to qualify for additional funding with better terms in the future.
Go Out & Get Funded
Now that you have a better idea of the funding opportunities open to you, it’s time to get out there and find that capital. Remember, it pays to be patient, do your research, and explore all funding options before making the giant leap into owning and operating your own business. Good luck!
The post How To Get Startup Funding: 5 Types Of Funding For Startups & 5 Tips To You Get Started appeared first on Merchant Maverick.
Starting any business can be challenging, but the quick growth and turnaround times commonly associated with entrepreneurial ventures come with their own particular set of challenges. You’re entering a fast-paced and cutthroat segment of the economy with both high risks and high rewards. To start your journey as an up and coming entrepreneur, you’ll need to take stock of your financing options.
If your business plan prominently features explosive growth, a liquidity-rich exit strategy, or even an initial public offering (IPO) within five years or so, this article is for you. For other prospective business owners who are looking to build something on a smaller scale, we have you covered with some broader resources for entrepreneurs.
Why Financing Can Be Hard For Entrepreneurs To Find (& Why That Shouldn’t Stop You Anyway)
Entrepreneurs face a few serious obstacles to getting financing, but if it were easy more people would be entrepreneurs, wouldn’t they?
The biggest issue is, of course, risk. You take an enormous one by starting a new, unproven business. Well over 50% of startups fail. Those aren’t great odds for the more conservative lenders out there, so right from the start, you’re going to be dealing with a smaller pool of lenders than is available to established businesses.
Related to that is the fact that bank consolidation has resulted in fewer traditional lenders, which means fewer opportunities for funding. The loss of community banks, in particular, has had a negative impact on lending. Online lenders have partially stepped into the void, but many are focused on very short-term lending.
In particular, the high growth startup model (though much romanticized in the media) is rarer than you might think. Fewer than 1% of businesses successfully raise venture capital.
Finally, social barriers ranging from prejudiced lending practices to geographic concentration of resources can greatly affect your chances of getting financing.
That said, “difficult” doesn’t mean “impossible.” With some creativity, diligence, and relationship-building, you’ll have a good shot at overcoming the odds.
6 Types Of Financing For Entrepreneurs
Now that we’ve gotten the cautionary tales out of the way, it’s time to look at some types of financing entrepreneurs can tap.
1) Venture Capital
If any funding source has become more closely associated with entrepreneurship in the public than venture capital, it would be news to me. There’s a certain mystique to being successfully being funded by groups that believe your business idea could take off.
Venture capital firms pool money from sources ranging from wealthy individuals to banks to pension funds. Each firm tends to specialize in a particular industry or type of company. Once they’ve raised an agreed-upon amount, they’ll shop around for businesses in which to invest.
A venture capital fund frequently disburses its funding over the course of several “rounds,” the first of which is called the seed round. As the name implies, this funding is meant to get your business off the ground. Successive rounds, called series, may become available as your business grows. Series A funding, for example, may be used to scale up a business that is already offering a product and has a customer base. Series B funding is similarly focused on growth.Â Finally, Series C funding focuses on helping mature companies expand into new products, or even acquire other companies. Different venture capital firms tend to specialize in specific phases.
Specialized Financing:Â Venture capital firms develop some expertise in the industries they’re investing in, which can be handy if you need advice.
Well-Connected: The venture capital circuit is pretty small and interconnected. Once you get your foot in the door, you can often use their connections to your advantage.
Eager To Work With Startups: Where many lenders are reluctant to work with businesses who have little more than an idea and a plan, venture capital firms may take a risk on big ideas.
No Debt:Â While you are giving up equity in your company, you don’t have to worry about “paying off a loan.”
Geographic Concentration:Â The majority of venture capital supported startups are in California, Massachusetts, New York, and Texas. Some states have no active venture capitalist firms. Even within the states that do, they’re frequently concentrated within a few cities (San Francisco, New York City, Boston, for example). That doesn’t mean you can’t get venture capital funding elsewhere (Cincinnati, Salt Lake City, and Atlanta all have some VC activity, for example), but there’ll be fewer firms in the mix.
Loss of Control: Accepting venture capital funding means giving up equity in your business. In some cases, it may even mean giving up some decision-making power to the firm.
It’s Just Hard To Get: As mentioned earlier, fewer than 1% of startups successfully raise venture capital. For all the hype VC gets, it’s actually a really small part of the business funding picture.
2) Angel Investors
Though sometimes used interchangeably with venture capitalists in casual conversation, angel investors aren’t quite the same thing. Whereas venture capital usually involves a firm aggregating funds from a number of different sources, an angel investor is an individual–typically wealthy–who is looking for a risky venture with a potentially high rate of return. Like a venture capital firm, an angel investor is usually looking for equity in your company in exchange for funds.
While word-of-mouth is still a common way to get hooked up with an angel investor, over the past decade or so there have been attempts to form networks of investors through hubs like AngelList and ACE-Net. Some angel investors even pool their resources and function like a venture capital firm.
No Debt:Â You’re giving up equity in your business instead of taking a loan.
Eager To Work With Startups: Whereas banks may be wary, angel investors are looking for the type of investment opportunity a startup can provide.
You Just Need To Convince One Person: While this is not always an advantage, you can hone your pitch to the investor rather than having to worry about a committee evaluation.
Loss Of Control: Again, you’re giving up equity which can also mean loss of decision-making power. With angel investors, there can also be an added risk of lack of expertise, which brings us to …
Potential Lack Of Expertise:Â Unlike venture capital firms, an angel investor may not be intimately familiar with your industry or product.
3) Debt Financing
For brevity’s sake, we’re combining bank loans, microloans, online loans, and personal loans. While there are advantages and disadvantages to each of these, in the end, we’re still talking about taking on and servicing debt in exchange for a lump sum of cash. While it’s difficult to get a loan before you’ve established a steady source of income, it’s not impossible, particularly where programs like microloans are concerned. These programs provide relatively small amounts of money with reasonable interest rates and long term lengths that can give you enough time to get your business up and running.
Retain Control: You’re not giving up any equity to a third party.
Flexible Exit Strategy: You’re on your own timetable for selling or making an IPO.
Building Credit: If you manage to service your debt regularly, it’ll make getting funding in the future easier.
Interest:Â Your debt earns it and you have to pay it off. This can be a drag on your growth down the road.
Risk Of Default:Â Starting a business is risky, and there’s a very real chance you won’t be able to pay your debt. If that happens, you’ll want to know how much personal liability you have, as well as the effect it’ll have on your credit.
Borrowing Amounts May Be Low:Â You’re probably looking at five-figure amounts or less when it comes to loans that are available to startups.
Another financing strategy is to not seek outside financing at all. That means working with your own savings and resources and taking a lean, minimalist approach to your business operations. When you do hit a growth phase, it’ll be funded by your business’s own revenue.
Retain Control:Â You don’t owe anyone anything, so you have complete control over business decisions.
Your Business Strategy Matters:Â You’ll only grow if your model works.
No Obligations:Â You have no debt or third-party timetable to adhere to.
Lack Of Funds: There’s a reason the old cliche “you’ve got to spend money to make money” persists. You may run into roadblocks that could be removed by money you don’t have.
Slow Growth:Â You won’t be able to scale quickly, which may put you at a disadvantage if you have competitors.
Time Investment:Â You’ll probably have to take on tasks you’d otherwise be able to delegate if you had employees.
Among the newer ways to get a startup off the ground is to crowdfund it. Crowdfunding is typically associated with pre-purchasing products, but some newer services are offering so-called “equity crowdfunding.” As the name implies, you’ll be giving up some equity in your company in exchange for funding from a pool of investors.
No Debt:Â Crowdfunding doesn’t come with any debt obligations.
High Funding Amounts Possible:Â Crowdfunding can be hit or miss, but when it works, the hauls can get pretty big.
You Don’t Have To “Know The Right People”:Â If you’re not socially connected to wealthy investor networks, crowdfunding can be a way to still raise large amounts of equity financing.
Loss Of Control:Â You’re giving up equity, which means you may also be giving up decision-making power.
Crowdfunding Campaign:Â Crowdfunding requires a sustained effort to get eyeballs on your business.
Platform Fees:Â Crowdfunding platforms have to make money too, so expect to be some kind of fee or to have them take a cut of the funds you raise.
It’s Still New:Â Some investors are still wary of equity crowdfunding.
6) Grants & Subsidies
Most parts of the country have programs in place designed to encourage entrepreneurship. These can take the form of tax incentives, subsidies, grants, or some kind of infrastructural support. You should familiarize yourself with the ones that apply to your type of business and take advantage of them when you can.
Free Money:Â While grants and subsidies may come with obligations, they aren’t debt or even loss of equity.
Builds Local Connections:Â Becoming a pillar of your community, so to speak, can open up additional opportunities down the road.
Can Be Time-Consuming: Grants, in particular, have involved, competitive application processes that may require a lot of your attention.
Obligations:Â Accepting this kind of help may come with strings attached. You may be expected to stay within a certain city or county for a certain number of years or hire X-number of employees.
Entrepreneur Financing Tips From The Experts
What better source of advice is there than people who have successfully undertaken the same journey you’re about to attempt?
Make Sure You Really Want Angel Investment
Entrepreneur Tim Berry, founder of Palo Alto Software and bplans.com, cautions founders to make sure they actually need and want angel investment prior to seeking it out. If you don’t need it, you’re better off without it.
Believe In Your Vision
In an episode of The Jordan Harbinger Show, angel investor Jason Calacanis says he can tell when an entrepreneur believes in their own vision and when they’re bluffing, a skill he compares to playing poker.
Getting A VC Firm’s Attention Is Part Of The Interview
Marc Andreessen, co-founder of VC firm Andreessen Horowitz, says that a founder’s ability to network their way into a meeting with a venture capital firm is a good barometer for their ability to forge other important business relationships, such as those with customers, suppliers, and even the media.
Understand The Motivations Of Your Potential Investors
Scott Kupor, author ofÂ Secret of Sand Hill Road, advises founders to consider what an investor is hoping to get out of their relationship with the startup. The right investor will be the one whose objectives align with your own.
Get Started On Your Entrepreneur Financing Journey
You had your vision in place. Now you have a sense of how you might finance it. If the odds seem daunting, remember that the rewards are also great.
None of these options sound appealing? Check out some additional ways to finance your startup. And if you’re looking to finance smaller, short-term expenses for your business, you’ll want to take a look at our top business credit card options for startups.
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