This week we’ll explore alternative startup funding sources. Sometimes, all it takes is a great idea to start a business. We sometimes read about startups with a revolutionary idea and a stream of investors lined up to get their money on the table right from the beginning. In the real world of startups, stories like this are not the norm. Rather, they’re the exception. Historical evidence tells us that for the clear majority of startups, securing startup funding from outside investors is time-consuming and extraordinarily difficult.
Moreover, looking at the data shows that the percentage of venture capital- or angel investor-funded U.S. new businesses launched each year is tiny. If you look at the universe of 550,000-plus new businesses launched in the United States each, less than two percent are funded by venture capital or angel investors. If you look at ‘startups’ versus just new businesses, the percentage funded by VCs or angels is higher, but not by a lot.
For founders looking for alternative startup funding sources other than VCs or angels, there are several options. Ultimately, it is a matter of finding which alternative startup funding source best suits your business. These opportunities take the form of loans, credit, points, grants, incentives, contracts, government programs, and private sector resources. Below is a rundown of alternative startup funding sources:
- Business Lines of Credit: A business line of credit provides more flexibility than a business term loan. As credit limits are relatively lower than a term loan, this is typically used as an additional source of cash flow to be used for smaller expenses such as operating costs. With this type of financing, you must have a certain credit score, be in business for a certain period, and satisfy a minimum annual business revenue. Compared to business credit cards, interest rates are lower, and you can still get funding in as fast as 24 hours. Similar to credit cards, you take away the hassle of credit application every time you need to borrow a certain amount. You can borrow any specific allowable amount at the time when you need it, and repay as soon as you are able to do so – you no longer need to wait for the maturity date, and incurring lest interest rates.
- Business Term Loans: Business term loans are more structured as compared to business lines of credit and credit cards, having fixed interest rates, with scheduled monthly or quarterly repayment schedules, and a set maturity date. Repayment terms can be for extended periods of time, and is appropriate for established business which are operating for a few years already. Although term loans require collateral, their interest rates are very competitive and is the preferred route for major funding needs, such as construction, large capital investments, and business acquisitions.
- Business Credit Cards: Business credit cards are ideal for short-term funding, due to their fast and hassle-free transaction processes. Be wary though, interest rates can be very high and minimum payments can be a drain on cash flow.
- Community Development Financial Institutions (CDFI): The government, in partnership with accredited private companies, also provides assistance to small business enterprises through programs under the CFDI Fund. These can include loans with low interest rates, literacy initiatives, and other forms of financial grants upon satisfying criteria set by the CDFI Fund. These are more appropriate for small-scale business at the community level, particularly those in low-income communities. Here is a post I recently wrote about the CDFI fund.
- Responsible Business Lending Coalition (RBLC): The RBLC is a collection of lending institutions, agents and mediators, and advocates that provide an avenue for small business lending. Together, the group aims to make credit and funding more accessible to small business enterprises, and prevent abuse from lenders. Furthermore, the members of the coalition have established a Bill of Rights, aimed at empowering small business owners through continued information dissemination on what is just and acceptable.
- Small Business Administration (SBA): At times, conventional lending channels are not viable, due to several factors such as lack of collateral, company applying identified to be highly leveraged (or have accumulated debt to finance operations), or other factors identified by the lending institutions. The SBA is a United States government agency in service of American companies. Institutions tie up with the agency and are the ones who are actually providing the financing, and not SBA itself. The agency serves as guarantor to a portion of the loan, making it easier for companies to secure one. This setup also results in a longer maturity on term loans. SBA also aids in financing real estate loans. The programs that they have enable business owners to own property at a lower down payment amount and interest rate.
- Supplier Diversity Programs: These programs encourage corporations and government agencies to source their supplies from minority-owned, women-owned, veteran-owned, LGBT-owned, and service-veteran-disabled-owned companies. An abundance of local suppliers means that small businesses no long need to source from other sources, mostly likely internationally. Some of the councils representing supplier diversity are The Women’s Business Enterprise National Council (WBENC), and The National Minority Supplier Development Council (NMSDC). In looking at alternative startup funding sources, this is one of the most unique, and little-known resources.
- Crowdfunding: The advent of technology gave rise to internet platforms that allow businesses to get backers to fund the business. As such, crowdfunding has emerged as a popular alternative startup funding source. A typical setup would be for businesses to post details of their product/service on a selected internet platform, and offer their product in exchange for funding. These allow companies to get funding prior to actual selling. Just May of last year (2016), Regulation Crowdfunding, or Reg CF, is established, through an Act, thereby allowing equity to be traded in exchange for funding. Kickstarter, GoFundMe, Indiegogo, are some of the crowdfunding platforms. You may access the site of the Financial Industry Regulatory Authority (FINRA) for an updated list of all platforms sanctioned by the FINRA.
- Grants: Certain types of startups aligned to strategic local, statewide or national interest can make use of grants as a source of capital. Most government business grants are concentrated in research and the sciences. There are, however, certain grants that support economic development, job creation or retention and more.
- Tax Incentives: Annually, the federal government and states provide tax incentives for qualified industries. This serves as a way for the government to entice businesses to encourage economic activity on a particular industry. If your business is already within it, or you are planning to venture into a business, you might as well take on the opportunity. For more information about tax incentives as an alternative startup funding source, check out this blog post.
If you are a founder looking for alternative startup funding sources, you should definitely explore the options above. The sources above of course do not include personal savings or friends and family. These are not listed because they are in fact, how the clear majority of new businesses launched in the United States each year are funded. For this post, I wanted to just focus on alternative startup funding sources. Got questions? Contact me today and we’ll talk.