Small businesses in need of capital have it tough nowadays. Banks have become notoriously conservative, lines of credit are tight and fewer investors seem willing to take a small business risk. Thankfully, some new and innovative alternatives are gaining traction that can help remove roadblocks to small business capital. And wouldn’t you know: some are made possible because of the Internet.
Crowdfunding is a way for common people (i.e., a crowd) to fund a project or business with a donation, investment or loan, usually via the Internet. Contributors may give a little or a lot, but the dollars can add up quickly given the multitudes of people you can reach online.
With rewards-based crowdfunding, contributors help a project they believe in come to life in exchange for a reward such as early access to a product or service. Crowdfunding sites provide an easy way to give your campaign exposure. Kickstarter and Indiegogo are two of the more well-known sites.
Crowdfund investing, on the other hand, enables a large group of people to help fund a business in exchange for a piece of the company. It’s a new provision tied to the American JOBS (Jumpstart Our Business Startups) Act of 2012 which loosens the restrictions on who can invest in private companies. Crowdfund investing rules are being ironed out now but once finalized, it’s expected that small business access to capital will open up considerably. And you can bet many more crowdfunding sites will open up shop on the Internet.
2. Peer-to-Peer Lending
Peer-to-peer lending pairs people seeking a loan with people willing to extend one with interest. No banks or lending institutions are involved; instead, a third-party intermediary takes care of the matchmaking. Internet sites such as Prosper and Lending Club are set up for this purpose.
Suppose you need a loan. Here’s how online peer-to-peer lending works:
- You visit a peer-to-peer lending site and specify the size of your small business loan and its purpose.
- The intermediary checks your credit and discloses that information to potential lenders.
- Multiple lenders bid on your loan for whatever amount they’re willing to invest.
- The intermediary packages the loan at the lowest rate the group of lenders is willing to pay. Rates are generally lower than those available through banks.
It’s a win-win situation: You get the small business capital you need and your lenders earn interest on the investment they make in your business.
If your monetary needs are small, you may qualify for a microloan, generally available through non-profit organizations that are more flexible than banks. The U.S. Small Business Administration and Accion USA are examples of agencies offering microloans up to $50,000.
4. Internet-based Lending
While banks can take a week or two to reach a lending decision, Internet-based lending platforms such as IOU Central and On Deck can reach a loan decision in as little as one business day. It’s all done electronically:
- You submit your small business loan application online.
- They tap online resources to gather the data necessary for a lending decision, such as your business’s cash flow and credit history. Results are often returned within a matter of minutes.
- Once your loan is approved, it’s deposited electronically into your bank account the next business day.
- Your small business loan is repaid through daily automatic transfers from your bank account.
5. Business Invoice Factoring
If you need funds faster than you’re getting paid, you can sell your invoices for work already done to a factoring company. They’ll pay you upfront in exchange for a small fee – anywhere from 90-99% of your original invoice amount. This may be a good option if you typically have to wait 30, 60 or 90 days for payment of your invoices.
6. Other Alternatives
Other sources of small business capital can include family and friends, a home equity line of credit or second mortgage on your house, or a loan against your 401(k) retirement plan or permanent life insurance policy (such as a whole life or variable life policy). You may also be able to raise capital through professional lending sources such as angel investors or venture capitalists that have an interest in your business.
The Hartford’s Business Owner’s Playbook offers valuable information on these alternatives and other facets of owning a small business, whether you’re just starting out, looking to expand, or transitioning your business to a new owner.
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