Raising capital is difficult even in the best of economic circumstances. As the pandemic recedes, businesses of all sizes are preparing for an influx of customers, shoppers and diners. While government-sponsored funding and loan programs may be coming to an end, entrepreneurs might be asking themselves: what other options exist to raise capital?
Let’s have a look at six creative ways you can raise capital for your business.
Equipment Financing and Leasing
If your business needs equipment, don’t use the proceeds of another loan to fund it. Instead, try to work with the manufacturer or distributor to lease the equipment as oftentimes you can get a better deal.
Leasing is similar to borrowing, except the manufacturer or distributor owns the asset and rents it back to you for a monthly fee, often with a lower payment than that of a traditional bank loan. If the terms of the leasing company are not attractive enough, you can seek equipment financing from several other sources including banks, credit unions, online lenders and even the SBA, depending on several factors, including your creditworthiness.
Assistance from IT Vendors
Thanks to programs launched during the pandemic from large, well-known IT and professional services providers, entrepreneurs are able to explore some relief from some business expenses.
Some of these might be grants, discounts or more attractive terms on services or even equipment. While large IT providers have traditionally offered special leasing options for businesses (similar to equipment leasing mentioned above), Dell, HP and other technology providers announced special financing and deferred payments for partners and customers during the pandemic and might extend these programs. Ask your marketing or IT resource if any continued discounting might exist in these areas.
Friends and Family
Financing from acquaintances and relatives remains one of the primary sources small businesses use to access capital. Even Jeff Bezos famously borrowed close to $250,000 from his parents to start Amazon in 1995.
However, as a business owner, you must decide whether to accept that investment — and further, how to structure it. For example, if you intend to make regular periodic payments, and demonstrate commitment on a consistent basis, then a loan makes sense. If you don’t want to make payments, offering an equity stake is an option. Of course, it’s difficult to regularly assess the business in the event that a friend or family member is curious about the business’ current valuation and what their equity stake is worth.
To avoid awkward situations and miscommunication, it’s better to err on the side of over-communication on how you are using the family-provided capital.
Several regional economic development initiatives offer microloans to support local businesses if those businesses plan to develop their communities.
Eligibility requirements vary and a few of the loans have zero interest. Some programs actually offer grants — i.e., a loan that does not have to be repaid. While these loans or grants might not be large, a business can still leverage the small amount of capital and create larger opportunities that create jobs and contribute to community growth. Further, the business can leverage the association with the economic development organization for publicity and good will, hopefully generating more business.
Alternative Small Business Lenders
In order to access capital quickly, businesses might also wish to consider alternative lenders that have fewer requirements than banks. Cash can be available as working capital within just a few days, and without the documentation, such as credit reports and tax returns normally required when applying for loans from traditional banks. Interest rates might be higher, but the working capital can serve as a much-needed infusion, and can be paid back quickly.
Revenue-based financing, also known as royalty-based financing, is a method of raising capital by offering investors a percentage of the business’ ongoing gross revenues in exchange for the funds they invested.
In a revenue-based financing investment, investors receive a regular share of the businesses income until a predetermined amount has been paid. Typically, this predetermined amount is three to five times the original amount invested. Revenue-based financing differs from equity financing, as the investor does not receive a stake in the business. It also differs from debt financing, as the payments are not fixed and interest is not paid on the principal balance.
To take advantage of the range of loan or financing options available, small businesses need to get creative. They can be savvier about where they seek financing and can harness a combination of sources to help their business thrive as the pandemic retreats.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Entrepreneur – A Small Business Owner’s Guide to Funding Options Without a New PPP
Investopedia – Revenue-Based Financing