Bank Loans And Venture Capital Aren’t The Only Options!
Even if we truly are at the beginning point of an economic recovery, the environment for small businesses and startups trying to raise money is certain to remain very challenging. Thanks to a banking system that is still shaky and investors that are still licking their wounds, many startups and small business types are struggling to fill their capital needs. Despite the harsh economic realities, aspiring entrepreneurs and struggling small business owners should not lose hope of being able to raise money. Outside of bank loans and traditional investments, there are other unique ways to raise money. I have put together a list of seven alternative ways that the savvy, entrepreneur can use to raise capital, even in this environment.
1. Peer-to-Peer Lending Prosper, Lending Club, and Virgin Lending are all sites that facilitate peer-to-peer lending activity. It works like this. An individual who wants to borrow money is matched up with an individual lender. Hence the name “peer-to-peer lending”. Despite the recent disruption in the U.S. market, when the Securities and Exchange Commission decided peer-to-peer loan notes needed to be registered as securities, the budding industry has bounced back. Actually, the market for peer-to-peer loans is growing by leaps and bounds. A recent article on Bloomberg stated that Lending Club’s loan volume doubled in 2010 to fill $120 million worth of borrowing needs. They are expecting this to double in 2011. These loans can be for pretty much anything and individuals looking to startup or fund and existing business are welcome to apply. Of course, as with any kind of debt, there are risks and the interest expenses can be steep on some of the loans due to the fact they are unsecured. The process can also take some time (weeks or even months) and not all are approved as the sites do have a vetting process. Still, they could be a viable option to get the money you need for your business.
2. Win A Startup or Small Business Contest So the bank has turned you down and discussions with investors have fallen through, but your business still needs money to survive. Well don’t give up just yet. Try looking for a contest for your business to enter. Colleges, non-profits, government agencies, and other organizations sponsor business contests for both startups and established businesses from time to time. One example would be the Naperville Area Chamber of Commerce Annual Small Business of the Year Challenge. This could be a good way for entrepreneurs to, both, raise money and market their brands.
3. Rotating Savings and Credit Association (ROSCA) This is reportedly a common way to finance businesses in a number of foreign countries where banking is not as prevalent. For example, in Mexico, they refer to this as a tanda or cundina. The basic plan (there can be numerous variations) calls for a dozen friends or trusted acquaintances to meet up every month for say a year. At these monthly meetings, each person would contribute a set amount of money to an overall pool. Then at the end of the year, all of the money that has been pooled together will go to the lucky person that is chosen at random.
Then the process would repeat the next year and the years after until all individuals had received an accumulated pool of money to start a business with. Just for a simple example, 10 individuals could agree to meet and contribute $1000 each month for a 10 month period. So at the end of the end of every month, the person chosen would have $10,000 to start a business with or invest in one they already have. One drawback with this plan would be if people didn’t hold up their part of the agreement, but nothing is risk-free. The legality is definitely a gray area here in the U.S. so you would certainly want to get everything in writing to try and protect yourself as much as possible.
4. Take Money From An Investor Now In Exchange For Paying Out A % Of Your Businesses Revenues Or Your Salary In The Future
Again this has some possible drawbacks in terms of legal ambiguity, but it could conceivably work out, assuming all parties were satisfied. A simple example would be you get $500,000 now in exchange for 5% of all future business revenues. Or maybe the % you pay out to the investor could be a combination of salary (at any future job you have) and your startup business. Either way, you would want to get everything written out and clearly defined with a lawyer.
5. Crowdfunding One exciting alternative to traditional businesses financing arrangements is crowdfunding. This method allows entrepreneurs to appeal to online communities, social networks, and peer groups for funding. A number of crowdfunding sites have popped up in recent years. They include Kickstarter, Rockethub, Peerbackers, and IndieGoGo, among others. Those who are interested in using this financing method should carefully review all of the details. Each site has their own rules and stipulations regarding how the money is raised, transaction fees, and other use of funding requirements. For example, Kickstarter will not allow entrepreneurs to use any of the money raised unless their project is fully funded within the set time fame. If not 100% funded all money is returned. Rockethub doesn’t have this requirement though. Another thing to consider is how much money you are expecting to raise. Most successfully funded pitches have raised around $10,000, but one site, ProFounder has been able to facilitate some much larger capital campaigns. One small business owner was able to raise a total of $54,000 from 19 people. In return, they will receive 2% of all revenues over a 4 year period.
6. Start A Business To Fund Your “Big Idea” Though it’s a very counterintuitive idea, I still think it could be workable. In my last hub were I provided numerous ideas for making extra money, I noted that some side jobs, like mowing lawns and shoveling snow could turn into part-time seasonal businesses with enough effort. This shines a light on a key point. Not all businesses need large amounts of money to start. Some are simple operations that can get off the ground with some hard work and initiative. I think using this “bootstrapping” method to raise money for a more ambitious business venture also has some additional benefits when compared with other financing methods. Not only will you raise money for your big idea, but you will get some experience in operating and managing a business in the meantime. Another benefit from raising money for a business by going into business would be the potential to attract other sources of capital. Investors are likely to be impressed by someone who has displayed such drive and commitment to their plan by starting a side business to fund it. Lastly the customers you come into contact with as you run your “simple” business could potentially become customers when you get your more “ambitious” business up and running.
7. Write A Hub With Your Business Plan This one is probably a long shot, but still, I would never say never. I got to thinking about it when I read about hubber Earl S. Wynn’s success story on the Hubpage’s community blog. They informed everyone that one of his hubs had been purchased by a TV production executive for around $2,500 so they could make a TV show. That shows one of the unpredictable and exciting things about the internet. You can put something up and years later it may open up an opportunity that you didn’t think was possible. I don’t see why a business plan written on Hubpages or other online venues couldn’t potentially lead to contacts with investors willing to put their money behind an aspiring entrepreneur’s plans. Of course, you would want to be careful about divulging any competitive advantages or proprietary information, but a passionate and well-written description of your business dreams could lead you to the money you need to fund an expansion or get your entrepreneurial vision moving forward.
It’s Tough To Get A Loan Or Secure Investments, But There Are Other Paths
As noted above things are very challenging right now for the small business owner and the fledgling entrepreneur alike. It’s always a tough road filled with lots of sacrifice when an individual accepts the journey of running their own business. When sources of capital are running dry and everyone is slamming the door in the face of entrepreneurship it makes it even tougher. This doesn’t mean that one should give up and take no for an answer. One of the key attributes of any successful entrepreneur is the ability to innovate and make outside of the box decisions. Hopefully, my list will illustrate that there are always other options to explore, when traditional efforts run out of gas.
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