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Many small-business owners are struggling to find funding in the current economy and business climate. Meanwhile, the regulatory environment has stalled: banks aren't lending as much money, and the huge wave of venture capitalist and private-equity capital has died down. In the tech sector, IPOs are less common than they were a few years ago.
Given these factors, many Silicon Valley companies having a hard time getting the financial support they need. To secure much-needed investment capital for new ventures or growth, small-business owners must think outside the box. If you're in the same position, consider these three commonly overlooked ways business owners can raise funds.
Related: Crowdfunding, Personal Credit and the 'Bank of Mom and Dad' Are a Few Options When VCs Aren't Interested
1. Apply for government grants.
If you work in biotech or other research-based industries, you might be able to get government support in the form of a grant. Cities with state college and university campuses also may have research centers and resources available to small-business owners, especially those who lead startups. Landing a grant could require a well-prepared presentation about your business and a formal application process.
If your company's mission is closely tied to agencies such as the Department of Agriculture or the Department of Energy, the U.S. Small Business Administration (SBA) can be another valuable resource. A new biotech company with a focus on research and development might qualify for one of these SBA grants. In contrast, a startup looking to fund a new retail store or launch a consumer smartphone app likely would find it more difficult to secure government dollars. But all three businesses also could turn to private-sector grants from philanthropic organizations such as the Bill and Melinda Gates Foundation.
Related: 11 Grants for Women-Owned Businesses You Need to Know About
2. Borrow from a BDC.
Many small-business owners overlook the value of loans from a business development company (BDC). BDCs can be an attractive option for small companies whose finances are in order but nevertheless were turned down by a bank or other financial institution due to their size. A BDC is capable of making larger loans at higher rates than banks, and they don't tie the loan to your personal assets. In many cases, the BDC's terms are more flexible than a traditional lender. Additionally, a percentage of the loan may be equity in the company. Strong BDCs include a venture capital team that supports cutting-edge companies positioned in a promising market. These teams seek out startups with certain attractive characteristics that need help getting established.
This type of finance arrangement can be especially beneficial for startups or companies that need capital quickly. The BDC will make a direct cash loan to your business and may be open to re-negotiating terms in the future. This freedom is key whether your business does extremely well or you struggle to keep up with payments.
3. Explore online lending options.
At the 2015 Lend It conference, former U.S. Treasury Secretary Larry Summers said he expects online lenders to reach more than 70 percent of small businesses. Many online lenders support small businesses and can process entire applications online. Companies such as OnDeck, Kabbage and SnapCap make loan decisions quickly, which means you could have funds in your bank within a few days.
Web-based lenders can command higher interest rates than traditional banks, but the odds of securing funding are substantially higher. Many online banks can approve borrowers with lower credit scores. A 2014 survey conducted by the Federal Reserve Bank of New York found that online lenders had a 38 percent loan approval rate. Larger banks had a 31 percent approval rate. Approval rates at regional and community banks were significantly higher, but those financial institutions also may impose high interest rates or inflexible terms.
Related: 6 Tips to Navigate New Online Lending Options
Whether you turn to BDCs or online banks for a loan, it's always a good idea to get multiple quotes and review the terms closely. If you apply for a grant, keep in mind that competition is fierce and the chances of rejection are relatively high. However, these three sources of funding can be attractive alternatives for small-business owners who need money quickly and are eager to put financing behind them so they can begin the real work of growing their businesses.
FAQs
Firms can raise the financial capital they need to pay for such projects in four main ways: (1) from early-stage investors; (2) by reinvesting profits; (3) by borrowing through banks or bonds; and (4) by selling stock. When business owners choose financial capital sources, they also choose how to pay for them.
What are three different methods of funding a new business? ›
Retained earnings, debt capital, and equity capital are three ways companies can raise capital. Using retained earnings means companies don't owe anything but shareholders may expect an increase in profits. Companies raise debt capital by borrowing from lenders and by issuing corporate debt in the form of bonds.
What are three ways an entrepreneur would raise funds for start up costs? ›
By having a solid business plan, networking and building relationships with potential investors, participating in startup events and competitions, and exploring alternative funding options, you can increase your chances of securing the funding you need to bring your idea to life.
What are the three main types of funding? ›
The main sources of funding are retained earnings, debt capital, and equity capital.
What is the most common way corporations raise funds? ›
The Bottom Line
Companies can raise capital through either debt or equity financing. Debt financing requires borrowing money from a bank or other lender or issuing corporate bonds. The full amount of the loan has to be paid back, plus interest, which is the cost of borrowing.
What are the two main types of funding? ›
There are two types of financing available to a company when it needs to raise capital: equity financing and debt financing. Debt financing involves the borrowing of money whereas equity financing involves selling a portion of equity in the company.
How do private companies raise capital? ›
Money from personal savings, friends and family, bank loans, and private equity through angel investors and venture capitalists are all options for funding throughout the life cycle of a private company.
Which business organization can raise funds most easily? ›
Angel investors are a crucial component of the ecosystem for raising equity because they are frequently one of the more easily available sources of early-stage finance for an entrepreneur. Working with angel investors has the most advantages because they can frequently decide on an investment on their own.
How to fundraise money quickly? ›
Host a fundraising event
In addition to making flyers, spread awareness about your fundraiser with a fundraising event. It will allow you to create strong connections with potential donors. Some simple, fast fundraising ideas include a car wash, a marathon, fall festival at a local school, or a trivia night.
What is the simplest method of raising money for a small business? ›
Crowdfunding
This is one of the simplest methods of raising funds for a startup. Each person who contributes is like a micro-investor. Crowdfunding is a great low-risk funding angle because contributors don't expect a slice of ownership the way VCs, angels, or family offices usually do.
The most common sources of funding for entrepreneurs in the United States are personal and family savings, bank business loans, and personal credit cards.
What are the three most common reasons most entrepreneurial ventures need to raise money in their early life? ›
"There are three reasons that most entrepreneurial ventures need to raise money during their early life: cash flow challenges, capital investments, and lengthy product development cycles." Evaluate Revolight's need for capital in terms of each of these reasons.
How do partnerships raise capital? ›
Partnership. In most cases, a partnership will be able to raise capital more easily than a sole proprietorship, but not as easily as a corporation. The borrowing power of each partner may be pooled to raise debt capital, or additional partners may be admitted to increase this pooled borrowing power.
How do startups raise money? ›
Crowdfunding. There are a growing number of new vehicles to raise money, such as AngelList, Kickstarter, and Wefunder. These crowdfunding sites can be used to launch a product, run a pre-sales campaign, or find venture funding.
How do you raise money for charity? ›
Ask for donations or clothes, toys and other bric-a-brac and have a car boot sale. Organise fun nights in - or out - such as karaoke, talent contests and a fancy dress day. Run a raffle - ask friends and family to donate prizes. Organise a charity car wash at work, or at home.
How do corporations raise money on Quizlet? ›
Corporations generally raise money by: selling stocks \textbf{selling stocks} selling stocks to stockholders, who then become co-owners of the company if they didn't have stocks of that company before. If some of the current stockholders buy more, they will increase their share in the company.
