Five Innovative Ways to Fund Your Business
Moving away from big banks to big thinking for capital
Back when Robert and I were starting our business, we had a great relationship with our local banker. When we needed a loan, we could get a meeting, sit down, and plead our case. We knew his name, and he knew ours.
He also knew that we were more than just numbers on a paper. On a few occasions we were actually able to convince him to lend to us in good faith, even when the numbers seemed a little riskier than the bank was looking for.
Today, you’d be hard pressed to find a banking relationship like that. The recession wiped out a number of community banks, and larger banks don’t lend to the little guys like the smaller banks did.
So, if you’re looking to get into investing or want to start your own business, the prospect of getting capital can seem a bit overwhelming.
The good news is there are plenty of ways to get funding that don’t require working in the banking system. Today, the alternative marketplace-based lending systems are a powerhouse industry worth $14 billion—and it’s a solution that can fit anyone’s needs.
Here are five market leaders that you should be aware of and worth your consideration if you’re looking for an injection of capital for your next entrepreneurial endeavor.
Square is known for its suite of POS tools for business owners. If you’re a Square merchant, you can qualify for a quick loan of cash that is as easy as pressing a button in the app.
As they explain:
To understand how Square Capital works, here’s an example. Let’s say you accept an offer for $10,000, the breakdown might be as follows:
· Amount Square deposits in your bank account: $10,000
· Total future payment card receivables due to Square: $11,000
· Percentage of daily card sales that go towards receivables payment: 10%
The amount you owe never changes, regardless of how long it takes to pay Square.
Kabbage works like a line of credit. By setting up an account on Kabbage you can qualify for a line in minutes from $2,000 to $100,000. You can then draw on that line as needed for various investments. You pay only for what you utilize, and the fee system is pretty straightforward:
The Cost of a Kabbage Loan
· Fees are 1% - 12%* of your selected loan amount the first two months and 1% for each of the remaining four months. No early payment fees.
· Every month, for six months, you pay back 1/6 of the total loan amount plus the monthly fee. You can pay early and save.
· Each draw is treated as an agreement between you and Kabbage. Draw against your line as often as once a day. Pay only for what you take.
OnDeck says they’re 100 percent committed to small business lending. And they put their money where their mouth is, having delivered over $2 billion in loans to small businesses in over 700 industries.
The company works like traditional banks, offering both standard loans and lines of credit that you apply for online. The difference is that decisions are reached in minutes and the money is in your account within 24-hours when approved.
How do they do this? According to their website:
We launched OnDeck in 2007 to solve a major issue facing small businesses: financing. We combined our passion for Main Street with cutting-edge technology to evaluate businesses based on their actual performance, not personal credit.
That’s enabled us to have significantly higher approval rates than if we only looked at personal credit scores, like many traditional lenders. And that lets owners spend their time where it should be—on growing their business, not seeking financing.
LendingClub is a peer-to-peer lending network, allowing individuals to pool their money to invest in opportunities. So, you can both lend money or apply for a loan.
Per their website:
Lending Club is the world’s largest online marketplace connecting borrowers and investors. We’re transforming the banking system to make credit more affordable and investing more rewarding. We operate at a lower cost than traditional bank lending programs and pass the savings on to borrowers in the form of lower rates and to investors in the form of solid returns.
Business owners can borrow up to $300,000 with low rates.
Funding Circle’s mission is “Fast, affordable financing for the millions of American small businesses who the banks have left behind.” Through their platform you can both get both a small business loan or invest in small businesses. You can borrow $25,000 to $500,000 over one to five years, and decisions are made within two hours with money arriving within a week.
You’ve probably heard of this one, but it’s still worth mentioning. Kickstarter is a crowdfunding platform that helps entrepreneurs and inventors launch products. Unlike the others on this list, this platform caters more to those who have a great idea but need the money to get started from nothing. The nature of Kickstarter, having crowds of people fund your project with an all-or-nothing goal, means you have to be well-organized with a thought out plan for your product and a good marketing angle. But for those who do it right, there’s a lot to be gained.
In the end, each of these options has its advantages…and it’s disadvantages. As with anything, it’s important to have good advisors. In this case, you’ll need to consult your lawyer and your accountant. And as always, you won’t get far if you don’t have a good financial IQ. That’s why financial education is so important.
The good news is that there are a number of options for entrepreneurs to find the funding they need for their ideas. If you have the right team, the proper financial education, and the willingness to put in the hard work, you’ll go far.