4 Non-Traditional Financing Alternatives For Your Small Business
Many small businesses fail within the first two years. For the most part, this does not occur due to low-quality products or services or poor ideas. Rather, this tends to happen as a result of insufficient funds. Running a business can be expensive and it usually takes some time for a business to establish its operations and build a market presence before it can become marketable. Traditionally, entrepreneurs have relied mostly upon six sources for their business funding needs:
- Dipping into personal savings
- Getting a bank loan
- Using credit cards
- Finding investors
- Inheriting a fortune
- Winning the lottery
However, while you may have a great idea, you may not be able to rely on these sources for all of the funding you need. Thankfully, some other financing options are available. Some of these options come as a result of new technological and social developments while others come as a result of good, old-fashioned ingenuity.
Sell Now, Produce Later
If the product or service you intend to provide is something revolutionary that your target market can easily see as being valuable, you may be able to sell it before you even produce it. Use Internet resources like databases and business listings to build a list of prospective buyers and then contact these buyers. Prepare a sales presentation that gives details on product design, function and price advantages. Encourage buyers to pay up-front – at least in part – to be first in line to receive the product. One option is to charge a refundable reservation fee. The problem with this option is that you cannot simply go and spend all of this money on the business, as you will not be able to repay people who request refunds. However, you can use some of it and having these resources can add legitimacy to your business that can help to attract investors and lenders. If your company offers services rather than products, selling preemptively may not be a problem at all.
The normalization of Internet access and the development of Internet-based technologies has led to a new way of selling now and paying later – crowdfunding. Through crowdfunding platforms such as Kickstarter, Rockethub, Indiegogo and Appsfunder, you can create a product-based pitch that will allow you to sell your product before it even exists. However, your crowdfunding campaign must abide by the guidelines specific to each service. For instance, Appsfunder is specifically for the funding of mobile device applications, while Kickstarter is only for creative projects located in the United States. To be successful, a crowdfunding campaign usually requires a dedicated and extensive social media campaign to go along with it. Also, whatever you are trying to crowdfund should be something that people see as exciting. For example, if you intend to import stainless steel ladles from China, this is probably not something that you could successfully crowdfund. However, if these stainless steel ladles have Darth Vader handles, you may be able to get a bunch of Star Wars fans excited enough about them to give you money.
It used to be illegal to use crowdfunding methods to sell stock in new companies. However, thanks to the JOBS Act, business equity crowdfunding is legal under certain conditions (as of early 2013). This can be a very effective way to raise the funds necessary for your venture. However, it is not a magic bullet. A number of regulations still apply, necessitating legal fees for things like the drafting of disclosure documents by a lawyer. Bear such legal fees in mind when calculating your expected business expenses. And again, when it comes to crowdfunding, remember the key principle: excitement! As with normal attempts to raise business equity, people’s ability to profit from investment is something that will motivate them to give you money. However, crowdfunders are also looking to get involved with something shiny, new and revolutionary. Show them how your company will bring change to the industry or to society in general.
Companies like Prosper and Lending Club are to debt financing what crowdfunding platforms are to equity financing. Person-to-person lending platforms allow you to post a loan request listing that details the specifics of your cash needs. Individual lenders may contribute to your listing with the understanding that you will pay them back plus interest. In some cases, if you have been turned down by a traditional business loan from a bank, you may be able to get a business loan through an online P2P platform. To do so, make a listing that conveys a sense of legitimacy, stability and professionalism on behalf of your business. Show prospective lenders that you will use their money wisely.
Using All Options
Finding a non-traditional way to fund your business is not a matter of picking one item from a list. You may use all or none of these methods, and using one may increase your ability to use another. For instance, if you have received 100 product reservations of $1,000 each from customers, this will increase your ability to raise money through a P2P loan. Be inventive and industrious, and one success can lead to another.