Sleighbells. Cranberry sauce. Christmas trees. Dreidels. The holidays are fast approaching and, for a small business, they are technically already here. If you’re just reading this, you literally have days to get in to gear. Act now!
Since 2008, banks have made it even more stringent for merchants to qualify for small business loans. As such, there are very few sources for small businesses to turn to for quick working capital without having to jump through major hoops to qualify. Quite frankly, banks perform rigorous financial review (profit & loss sheet, detailed business plan, 2 years of tax returns, business owner’s blood type, first-born child’s dental records and food allergies…okay maybe not the last three) that would turn off and/or disqualify businesses that are both viable and income-producing.
But, guess what, it’s 2016, baby! Henry Fernandez doesn’t need to wait on a bank loan to grow his Italian ice shop neither does Janice Kennedy when she wants to put a new wing on her Irish pub or Leon Baptiste when he needs equipment for a new construction job. In fact, no proprietor has to wait on a bank loan anymore to grow, expand or, even, start his/her own business.
Here are the 3 top alternative funding sources for any business in 2016.
Seeking funds from venture capitalists is a good source for growing businesses in the new millennium. You’ve all seen ABC’s Shark Tank, right? Where a bunch of millionaire and billionaire business tycoons listen to pitches made by aspiring and current entrepreneurs then decide if they’d like to get in bed with the guy selling the latest toilet tissue dispenser or the world’s first self-tying sneaker.
Here’s the catch: venture capitalists are looking for ownership stake in the business and they seek to deploy hundreds of thousands or millions of dollars, not small investments, because they are seeking multiple times return on that capital. Thus, venture capitalists focus heavily on the size of the market: if they don’t believe the market is large enough, they won’t invest.
Additionally, securing financing from venture capitalists is kind of like dating; the VC needs time to warm up to you. So, VCs want to get to know you – the founder. They want to watch you execute and make progress before committing to invest in your idea, invention or company.
The merchant cash advance industry has become popular in the past decade as it is known for underwriting high-risk loans – loans that banks wouldn’t touch with a ten-foot pole.
Companies like On Deck Capital and Merchant Cash & Capital in New York or Global Business Lending in Ft. Lauderdale, Florida qualify businesses without a credit check. Instead, they use more common-sense guidelines to ensure that the business they lend to is financially healthy enough to pay back a short-term loan.
They must prove things like having a monthly bank balance of $6,000, having been in business for 3 months and not be in an open bankruptcy.
The funds that these companies provide are technically not loans; the correct term is a merchant cash advance, which is a short-term advance of funds against a business’s future receivables. According to Entrepreneur.com, this 15-year-old industry is “booming, mainly because bank lending criteria have become so tight since the Great Recession that very few small businesses are able to qualify for bank loans.”
Businesses like restaurants, retail shops, contractors and service companies generally find these funds helpful because most times they need lump sums to purchase supplies, equipment or to expand their space. They can qualify for $2,000 to $3 million.
Crowdfunding has also grown in popularity due to the very reason that merchant cash advance firms did — a lack of lending appetite from the major banks.
Crowdfunding uses a website and email campaign to persuade individuals to each give a business a small donation — $10, $50, $100, maybe more — within a fixed term. It has all become possible in recent years thanks to a proliferation of websites that allow nonprofits, artists, musicians and businesses to raise money. There are more than 600 crowdfunding platforms around the world with fundraising reaching billions of dollars annually, according to the research firm Massolution. The most common are Kickstarter, Indiegogo and The Lending Club.
If you are going to use a crowdfunding platform, you must have an engaging story to tell so that audiences can almost immediately attach value to your product or service. A business owner initially sources individuals from within his/her own network of friends, sending out correspondence through their email’s address book. The key is to gain interest from friends of friends or strangers, so that your network doesn’t exhaust quickly.
Here’s the tricky part: a business can raise thousands at the end of such a campaign, but most times can only keep the money they raised if their total funding goal is met. Also, be careful, a business risks getting sued if it promises customers products or perks in return for donations, and then fails to deliver.