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KEY POINTS
- Explore various funding options beyond traditional loans, like microloans and crowdfunding.
- You can leverage retirement accounts and supplier financing to kickstart your business.
- Motivated sellers and a process called “factoring” can provide unique opportunities for business funding.
My friend Jeff wanted to start a food truck business and had read a lot about crowdfunding sites like Kickstarter. He heard that people give you money if you put up a video on Kickstarter. And he knew he would probably rather do that than take out a personal loan.
So he did.
But they didn’t.
After licking his chops (so to speak), Jeff decided to do things the right way. He saved some money to invest in the venture, created a solid business plan, launched a solid website, and found a business partner.
Kickstarter was only one part of his refined funding plan, and this time it worked. So did his plan to get an SBA microloan, and also an investor. Jeff raised about $15,000, which, according to Fundera, is about $5,000 more than the average startup.
So yes, there are indeed a lot of creative ways to get the money you need to start or grow a business these days. Here are a few of our favorites.
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SBA loans
The U.S. Small Business Administration (SBA) doesn’t make loans, but it does guarantee them. As such, getting an SBA-backed loan can be easier for entrepreneurs than getting a conventional business loan. There are many SBA loan programs you can choose from. You can start your search on the SBA website.
Crowdfunding
Crowdfunding is a relatively recent addition to the small business funding toolkit. With crowdfunding, yes, as Jeff understood, you post content on a site like Kickstarter or IndieGoGo (there are many more), and then you give people rewards for investing in your dream. The trick is, making a video is just one part of the process. You need to share ideas, plans, and products that people will want to invest in.
The beauty of crowdfunding is that these funding pledges do not need to be repaid. They’re not loans; they’re investments made in exchange for the “reward.” In Jeff’s case, for instance, the second time around, he named sandwiches after his investors.
I have coached many people through successful crowdfunding campaigns and would say the keys to success are:
- A great presentation: You want to entice people, share your passion and project, get folks excited about helping you, and get them equally excited about the reward they will get.
- A solid reward system: The more they pledge, the better their rewards need to be.
- A great idea: People will invest in your dream only if it is realistic and valuable.
Microloans
A typical bank loan could be from $100,000 up to, say, $5 million or more. Some people, however, don’t have the credit to get those bigger loans, while others have significantly smaller needs. Enter microloans. Institutions like Kiva and the Small Business Administration offer smaller loans that can range from a few thousand dollars to $50,000.
Also check out Community Development Financial Institutions, or CDFIs. These local nonprofits also make very small microloans (some as small as $500). One example is PrestamosCDFI, which is “dedicated to reducing barriers to capital and providing equality for businesses and individuals, promoting community revitalization by creating jobs, increasing the availability of capital, and supporting local economic growth.”
Retirement accounts
No, I’m not telling you to raid your retirement savings to fund your business, but there is a nifty trick you can use. The IRS allows you to take an interest-free loan from your retirement accounts for up to 60 days, penalty free. But be careful using this one.
According to FinancialSamurai.com, “If you fail to meet the 60-day deadline, your retirement funds will be subject to income taxes. And, if you’re under 59 1/2, an early withdrawal penalty of 10% will also apply.”
Factoring
If your business has money owed to it — accounts receivable, for example — you can sell that down-the-road income for money today to a company called a “factor.” Say a client owes you $10,000 payable in 60 days for a service you provided. A factor could buy that invoice from you and pay you for it within a few days (less a small percentage, which is that company’s profit.)
Seller financing
Maybe you want to buy a business but don’t have the capital or credit necessary to do so. What to do? Look for a motivated seller. A business owner who needs to sell their business, for whatever reason, might be willing to act as the bank and help finance your purchase.
Supplier financing
I love the book Starting on a Shoestring by Arnold Goldstein. In it, Goldstein shares how he started Discount City, a discount warehouse store, by having his suppliers provide almost all of his inventory on consignment — to the tune of $120,000 in product. Goldstein started the business with only $2,600 out of his own pocket.
So yes, the funding you need is out there. You just need to get creative and go find it.
Our Research Expert
Source: bing.com
