Blog | Entrepreneurship

How to Raise Capital Through Business Lending

It’s easier than ever 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.

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Hint: Big banks aren’t the only way to raise funds

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 2008 recession wiped out a number of community banks, and larger banks don’t lend to the little guys like the smaller banks used to.

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 if you’re only focused on institution-based financing. But don’t let that deter you from your goal, as there’s never been a better time to pursue entrepreneurship — especially if you have the key to success in business: an entrepreneurial spirit.

How to raise capital for business

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 (also known as peer-to-peer lending) are a powerhouse industry —and it’s a solution that can fit anyone’s needs.

Ready to find out how to find capital? Let’s explore six market leaders that you should be aware of and are worth your consideration if you’re looking for an injection of capital for your next entrepreneurial endeavor.

Kabbage works like a line of credit. By setting up an account on Kabbage, you can qualify for a line of credit in minutes up to $250,000. You can then draw on that line of credit as needed for various investments. You pay only for what you utilize, and the fee system is pretty straightforward:

Here’s how it works:

  1. Square Capital

    Square is known for its suite of POS (point of sale) 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%

    So it’s an automatic repayment model, where your loan is repaid using a percentage of your Square daily card sales. The amount you owe never changes, regardless of how long it takes to pay Square. No late fees, ongoing interest or surprises. To date, they’ve extended $6.3 billion in funds to more than 300,000 merchants. The end result? A whopping 95% of those merchants say their businesses grew as a result. If you still need more incentive about this lending system, applying for this loan won’t even affect your credit score.

  2. Kabbage

    Kabbage works like a line of credit. By setting up an account on Kabbage, you can qualify for a line of credit in minutes up to $250,000. You can then draw on that line of credit as needed for various investments. You pay only for what you utilize, and the fee system is pretty straightforward:

    • Six-month, 12-month and 18-month terms are available. The six-month terms require a $500 minimum loan.

    • Fee rates are 1.25% - 10% of your selected loan amount, which is based on a number of business performance factors.

    • Every month, you pay back an equal portion of the loan principal, plus the monthly fee.

    • No prepayment penalties, which means you can pay your loan off early and save on those monthly fees.

    • 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; there’s no obligation to take the funds if you qualify.

  3. OnDeck

    OnDeck says its 100 percent committed to small business lending. And they put their money where their mouth is, having delivered over $13 billion in loans to small businesses while maintaining an A+ Rating with the Better Business Bureau.

    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 about 10 minutes and the money is in your account within 24-hours when approved. Isn’t it amazing how quickly lending systems work?

    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.”

    Here's what you can expect:

    • The offer term loans from $5,000-$50,000 with rates as low as 11.89% APR. You’ll pay a set amount for a fixed amount of time. The term lengths are 3 to 36 months and, since they report payments to bureaus, your on-time payments will help build your business credit.

    • Alternatively, you can choose a line of credit and pay only what you borrowing from this flexible plan — between $6,000 and $100,000. The term length is 12 months, and there’s no penalty fee for prepayment. Once you’ve repaid what you borrowed, you have access to your full credit limit again.

    • No personal or business collateral is necessary.

  4. LendingClub

    LendingClub is a peer-to-peer lending system, allowing individuals to pool their money to invest in opportunities. So, you can both lend money or apply for a loan. More than $50 billion has been borrowed by 3 million customers.

    Here’s how it works:

    • First you’ll apply and get customized loan options in minutes.

    • Next, you’ll choose a loan offer by selecting the rate, term and payment options that work best for you.

    • That’s it: Money will flow directly into your bank account.

    • Also, repayment terms are from 6 months to 5 years and there’s no early pay off fee.

    Wondering if you’re eligible? They are looking for 12 or more months in business, at least $50,000 in annual sales, no recent bankruptcies or tax liens, and you must own at least 20% of the business and have at least fair or better person credit.

  5. Funding Circle

    Funding Circle’s website claims it’s the “world’s leading platform for small business lending” and has raised approximately $700 million since 2010. It’s 100% focused on small businesses, helping them cover upfront costs, tackle emergencies, consolidate business debt and grow their businesses.

    • 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 six months to five years, and decisions are made in as little as 24 hours with money arriving within a day.

    • The online application takes about six minutes to complete and you’ll hear from a loan specialist within an hour.

    • They have additional options for women-owned businesses and minority-owned businesses, too.

  6. Kickstarter

    You’ve probably already heard of this one, but it’s still worth mentioning. Kickstarter is a crowdfunding platform that helps entrepreneurs and inventors launch products — its mission is to “help bring creative projects to life.” 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.

    Since Kickstarter’s launch in 2009, 18 million people have backed a project, $4.9 billion has been pledged, and 180,092 projects have been successfully funded. Some of these projects have even gone on to win Grammys and Oscars.

Now that you know how to find capital, what’s next?

In the end, each of these options has its advantages — and its disadvantages. As with anything, it’s important to do your homework and weigh the pros and cons. It’s also wise to have trusted advisors share their expertise. In this case, you’ll want to consult your lawyer and your accountant to ensure you’re thinking through the process properly, including any long-term ramifications of your decision.

And as always, you won’t get far if you don’t have a high financial IQ. That’s why financial education is so important. Perhaps it’s time to explore some Rich Dad classes in personal finance, real estate, stocks and entrepreneurship.

Also, it’s a good time for this important reminder: Do not to listen to people who aren’t experts in these areas themselves. Be forewarned that when you’re ready to take the leap to entrepreneurship, countless “negative Nancys” will likely want to share their uninformed opinions about why you shouldn’t pursue your dream of entrepreneurship — prepare yourself for these awkward conversations by studying up on the worst advice for entrepreneurs.

Also, please note that the list of lending systems I just shared is only the tip of the iceberg when it comes to options for entrepreneurs wondering how to raise capital for business. If you have the right team, the proper financial education, and the willingness to put in the hard work, you’ll find a way to use lending systems to find the capital you need to make your dreams come true.

Original publish date: August 12, 2015

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