Financing an expansion or securing working capital has never been easier than it is today.
By Andrea Holved
For business owners seeking working capital or financing for a new product line or expansion, there’s never been a better time. Since the JOBS Act became law in 2012 and Title II of the law went into effect in 2013, the legal landscape for publicly advertising opportunities to invest in your private company has changed dramatically, and dozens of Internet startups have opened shop to offer small businesses new crowdfunding alternatives to the traditional business loan.
Meanwhile, online lending has seen its own innovations and advancements, creating even more options beyond your local bank. Read on to learn about the various types of online funding available, and how to determine which is the best fit for your SMB.
There are several online funding platforms designed for organizations to raise money by way of donations from individuals who want to support their project, product or mission, and many of them allow fundraisers to keep what they raise even if they don’t meet their fundraising goal (though these platforms generally do keep a percentage as commission, and a higher percentage if you’ve fallen short of your goal). The most popular of these types of fundraising sites is IndieGoGo, though RocketHub is a strong competitor with an emphasis on the arts.
Joining is free, but launching a campaign requires some effort: You’ll need a video explaining your goals and why your venture is worthy of investment, and for most sites you’ll also need to offer various gifts or other perks as a thank-you for donations large and small. You’ll also need the time and resources to market your campaign while it’s active (typically 30 to 60 days). Related: Taking time to save time–and grow profits.
The businesses that do best on these sites have a strong social mission and/or strong community ties, and usually pin their funding request to a specific project or product that furthers their mission or contributes to the greater good.
If you need access to capital quickly, an online loan may be the fastest way to get it. Startups in this market have put an emphasis on speed, and some new sites can approve an applicant in a few minutes.
The downside of online loans is that you also have to pay them back quickly. Terms range from 30 days to two years—in contrast to traditional bank loans, which typically are for two to five years. Online loans also carry higher annual interest rates—typically in the range of 10% to 80%—though, when coupled with shorter loan terms, these high interest rates don’t end up costing as much as you might assume.
“Even though the interest rate is much higher on online loans, the total out-of-pocket cost on an online loan is often much lower,” says Priyanka Prakash, a former attorney and current small-business loan specialist at Fit Small Business. “I think this is something that a lot of people forget, even those in the business financing industry.”
Prakash points out that what makes the online lenders so fast are their algorithms for determining eligibility, which means that your application isn’t being evaluated on a case-by-case basis. “If you don’t meet the minimum qualifications for an online loan, don’t waste your time,” she says. Before applying, read through the lender’s approval criteria and determine whether you’re a match based on their requirements for your revenue and personal credit score.
The approval criteria for online lenders can vary widely. Some startups are making a name for themselves by targeting specific business problems such as inventory shortages or past-due accounts receivable—and basing their approval criteria on metrics related to these issues. Determine why you need funding, and then investigate loan providers to see whether there is one out there designed to help business owners in exactly your situation. Related: Tech tools to improve operating efficiency.
Funding for specific projects or products
Perhaps the most famous online funding platform is Kickstarter, which functions similarly to the donation-based sites discussed above, but with the caveat that businesses can only keep the funds they’ve raised if they meet their fundraising goal. Kickstarter also requires that you raise funds for a specific project—such as an expansion—or product launch.
This can be a good option for businesses with a physical product that is very “shareable”: something that makes a consumer feel good or surprised, and that appeals to a broad general audience rather than a niche group. Toys, gadgets and food products, for example, tend to do well. Be prepared, however, to invest a lot of time and energy into marketing your campaign, and be sure to have quality images and video to promote your campaign. Related: Tech tools for building customer loyalty.
Sites like Gust, which functions as a kind of Match.com for businesses seeking investments and investors seeking opportunities, and CircleUp, which screens companies before allowing them to advertise investment opportunities on its platform—are bringing the elusive world of angel investing to the Internet. The tech-focused MicroVentures prides itself on early-stage investing and sees itself as an alternative (or complement) to venture capital firms.
This option is for business owners who want to raise large sums of money—CircleUp accepts fundraising goals from $100,000 to over $10 million—and who have concrete plans for an exit strategy (i.e., getting bought out by a larger company or taking the company public), which is what will make investing in their company appealing to a professional investor looking for a healthy return. Related: Tech tools free up SMB owners for dream journey.
This article was underwritten by HP: Introducing HP BusinessNow, the right technology to help your business grow.