7 Financing Alternatives for When Your Investor Funding Falls Through
By Margot Carmichael Lester, Staples® Contributing Writer
It feels straight out of the Worst Case Scenarios Survival Handbook, but seeing your financing fall through doesn’t have to cause panic. Chances are, you’ve got more options than you think.
Here’s a quick look at 7 additional ways you can fund your venture.
1. Friends and family. Sometimes, your best funders are the people who know you best. Bryan O’Connell and Michael Barzman, co-founders of Invisiplug, raised early money for their product from friends and family. “We went out to a lot of people that we knew, a lot of people that we'd worked with in the business, and pitched them the product,” O’Connell recalls. “When you're raising money, it's the easiest place to start, with friends and family, because traditionally you're looking at climbing an uphill road, and there's no guarantee, right?” The hope is that these people will be more likely to forgive you (and the debt) if the business doesn’t survive.
2. Venture capital. Many entrepreneurs dream of getting a great deal with a venture investor with deep pockets, extensive connections and loads of expertise. Individuals or groups of investors provide venture capital (VC) in exchange for an equity stake in your company. Terms vary widely depending on a number of factors. If you go this route, look for qualified investors with experience financing your type of enterprise. VC funding is most appropriate for manufacturing and tech companies.
3. Staples Business Loans. Banks don’t like risk, so they’re most likely to lend to owners who are already up and running. But that doesn’t mean you shouldn’t see what’s out there. Staples Business Loans, powered by Lendio, makes it fast and easy to explore loan options online. “The market is fragmented and most small business owners don’t know who to turn to or which options are right for them,” notes Robert Diestel, head of credit marketing and global payment strategy for Staples. “Staples and Lendio help small businesses examine their viable options and the advantages and disadvantages of each, whether it’s from a commercial bank, an industrial bank or other capital provider.”
4. Small Business Administration loans. A Small Business Administration loan is an option for entrepreneurs with an established track record, a solid business plan, collateral and a credit score above 650. These loans are applied for at a financial institution, and can take longer to process — up to 120 days — so they’re not a great fit if you need fast cash. But the terms can be very favorable: a good range of loan amounts and a 20-year term with a 10-year call and options to refinance.
5. Crowdfunding. Sites like Kickstarter, Fundable or IndieGogo are great when you need funding to “validate a product, get pre-sales and collect cash on the front end,” says Caleb Light, who successfully pitched Power Practical to investors with co-founder David Toledo. “In a product-oriented business, that's super important because in order to make money you have to spend money to get the parts. You can have people pre-order it, then they’re buying it before you’ve actually built it. Crowdfunding is an awesome vehicle for helping entrepreneurs raise capital in a non-diluted way.” That’s the donation-based approach, in which nobody expects a return of more than, say, some swag or early access to the product itself. There is also equity-based crowdfunding, which is similar to a VC investment in that investors expect equity and, in some cases, some level of involvement or control. Most sites generally take 4 to 5 percent of the money you raise in addition to transaction fees that can be as high as 4 percent.
6. Merchant cash loans. This type of funding leverages your business cash or credit card deposits in exchange for about a month’s worth of revenue. While it can be a fix for urgent cash flow, the price is very high. Before electing this option, talk to your accountant and attorney.
7. NOW account. A relatively new financing option, financing companies will “buy” your receivables for a percentage (often 2.5–3 percent), giving you access to cash before your customers actually pay — minus the fee. “If your customer is late paying their invoices, which is the norm, you typically have no leverage to charge late fees and must simply wait for payment,” explains Kim Humphreys, vice president of marketing and business development for Atlanta-based NOW Corp. “In other words, small business suppliers must provide their commercial and government customers with a free loan in order to make the sale.” A NOW account gives you more control over the payment cycle to improve cash flow without negatively impacting your customer. This kind of financing makes most sense for B2B product and services companies, but not for most B2C businesses. Before choosing this type of financing, talk to your accountant to make sure it’s the right option for you.
See? There are plenty of options to get your venture funded. So get your documentation together, meet with your accountant or business manager, and start making the rounds!