One of the most challenging aspects of owning and running a business is finding funding for that business. According to the Federal Reserve’s Small Business Credit Survey, 45 percent of companies applied for financing in 2016. Of those firms, 24 percent didn’t receive any financing. About 60 percent received less funding than they had requested. Among the reasons for not receiving the financing applied for were weak business performance, high amounts of existing debt, low credit scores and not enough collateral.
While banks and credit unions are common sources of financing for businesses, they aren’t the only options available today. Businesses that are having difficulty receiving funding from traditional sources might consider looking at a few non-traditional funding options.
Peer to Peer Lending
When your company applies for a loan from a bank, it’s the bank that will provide the full amount of the loan. When a company applies for a peer to peer loan, it’s often the case that numerous people, scattered across the country, will contribute a small amount towards the loan. For example, if your company would like to borrow $20,000 to invest in new equipment, it could be the case that 20 individuals would each contribute $1,000.
Peer to peer lending typically takes place entirely online. Those who wish to make loans sign up for a platform and businesses that want to receive financing also create accounts. The platforms act as intermediaries, connecting businesses to lenders (who are often individuals).
Since peer to peer loans are often for small amounts (in the tens of thousands, rather than hundreds of thousands or millions) and because the loans are often broken up among several lenders, there is less overall risk for an individual lender. The lower risk makes it slightly easier for a business who is having difficulty receiving traditional financing to get approved for a peer to peer loan.
When you hear microloans, you might picture an individual lending $25 or $100 to help a person in a developing country launch a small business. Although the microlending model got it start by helping people in developing countries launch businesses, it has since spread globally. Microloans (which often refers to loan amounts of up to $50,000) are now available to all types of companies.
For example, the Small Business Administration (SBA) oversees a microlending program that provides loans of up to $50,000 to eligible businesses. The financing can be used to cover the cost of equipment, inventory, furniture or as working capital. It can’t be used to repay existing debts.
Several other microloan companies exist and often have specific requirements for the businesses they lend to. For example, some lenders only provide funding to businesses located in certain states or cities. Some lenders participate in the SBA’s microlending program while others do not.
Crowdfunding has a few things in common with microloans and peer to peer lending. Like peer to peer lending, it replaces traditional banks or credit unions with individuals. Like microloans, the amount raised through crowdfunding efforts is usually on the small side. One considerable difference between crowdfunding and microloans and peer to peer lending is that the money raised through crowdfunding usually isn’t a type of debt financing. Your business most likely won’t need to repay the amount you receive.
There are a couple of different types of crowdfunding out there. The one that might be most familiar to people is the form used on sites such as Kickstarter. Individuals agree to contribute a certain amount to a campaign. In return, they receive a reward or prize, such as the new product that the business launches.
The second form of crowdfunding is equity-based. Instead of getting a reward, people who contribute to a campaign receive a stake in the company itself. How much of a stake an investor receives depends in part on the size of their contribution to the campaign.
Are any of the non-traditional financing options discussed above right for your business? The team at New Direction Capital can help you better understand your financing options and can help you choose the sources that are most appropriate for your business’ needs and growth plans. To learn more, contact us today.