Sometimes focusing solely on money is like playing Russian Roulette with a six-shooter that has five rounds chambered. It tends to not end well. A typical scenario that exemplifies this is the salesman who is so focused on the sale (aka the money) that he forgets to be a human being and show fellow interest in his potential customer. That attitude almost guarantees the person won’t be a customer – ever.
However, sometimes money is the key thing. No, it’s never the most important factor, but it’s often an essential one. Just ask anyone looking to start a technology driven or manufacturing dependent enterprise, or an intrepid ‘trep looking to expand his or her existing operations. Without money, it’s nearly impossible to do these things.
The challenge is finding money, or more specifically, finding someone willing to lend money. When a business or individual needs capital for startup or expansion, their available options fall into three broad categories:
- Traditional Financing (aka Banks)
- Alternative Financing (Microfinance, Factoring, Angels, Crowdfunding, etc.)
If you’re in a position to fully fund your startup or expansion personally (bootstrapping), that’s a great position in which to be. For the majority of entrepreneurs that isn’t the case. While they likely have some cash on hand, they don’t have enough to realize their vision. Some choose to do what they can with the cash available, trusting that they’ll earn additional funds to complete their plans in the future. Yet that often isn’t a realistic option. Sometimes you have to establish certain elements of your plan before you can realize your vision. For example, if you’re bringing a new product to the market, you must invest in sufficient research and development prior to its release. Having funds for partial research or mediocre development simply won’t cut it. In those cases, you need money, and you need it now. That means turning to the first two options.
Traditional vs. Alternative Financing
Local and national banks have long been the mainstay of small business financing. In recent years, however, economic upheavals and bank failures affected the criteria used by those institutions when approving small business loans. The result is a lending landscape that makes obtaining bank financing more difficult for the average entrepreneur. More and more, small business owners turn to alternative lending options as a means of meeting their startup and expansion needs.
- Brock Blake recently wrote an article appearing on Forbes website discussing the need for the SBA (Small Business Administration) to embrace alternative lenders as part of their loan guarantee program. He notes that alternative lenders have outpaced traditional sources in recent years when it comes to the total dollar amount of approved loans. Part of the reason is that alternative lenders are more flexible in their requirements for loan origination. They’ll work with businesses that banks don’t consider credit-worthy due to factors such as not being in business long enough or because the principals have a less-than-desirable credit score. Yet their repayment rate is high. Accion, a microfinance lender I’ve connected customers with in the past, boasts a repayment rate of over 95%. This simply means they’re successful at helping businesses accomplish their goals.
- Factoring, which allows a business to be paid now based on future receivables in hand, can provide immediate access to funds for expansion. In a similar manner, some lenders extend money based on projected future income, such as credit card sales. AmeriMerchant has a few programs that help businesses leverage those future sales to fund current projects. Often businesses use them to extend operations, purchase inventory and/or equipment, or beef up their infrastructure to capitalize on emerging trends and technologies.
- Angels represent another source of startup/expansion capital. These are savvy investors with cash-on-hand they’re willing to pour into business ventures they feel have merit. Angels require a decent return on their investment, which may come in the form of lucrative repayment terms, a stake in the business, or both.
- Crowdfunding existed in rudimentary forms throughout the years. With the advent of the information age, however, it has come into its own. In our digital age, an entrepreneur can figuratively take their idea “to the streets” and let average people invest in their project, whether a startup or an expansion. Using sites like Fundly, Indiegogo, and Kickstarter, you can post your project and give people a chance to invest in your venture. Depending on how compelling your story, you’ll attract the capital needed to accomplish your goals.
Which Source is Right for You?
Each of the options above has merits and limitations. You’ll have to weigh each of them carefully to see which aligns best with your goals, the level of inclusion you want to grant investors, and the repayment terms and/or fees you’re willing to accept. Naturally, it’s in your best interest to speak with both your financial and legal advisers to make sure you protect your rights and best interests. Additionally, do your homework to insure you don’t underestimate your financial needs. While requesting more money than needed increases your debt service, you can normally return any borrowed funds early without any prepayment penalty. On the other hand, not having enough may make it necessary to scramble at the last minute trying to raise additional capital. Don’t sell your vision – or yourself – short.
Whichever method you choose in terms of financing your efforts, be sure to get enough for your needs. Life isn’t all about money, but when it comes to the matter of business startup or expansion, money sure helps!