11 Sources of Funding for Your Small Business
Interest rate: N/A (payback in form of equity or rewards)
Repayment schedule: 5+ years for equity, 1+ years for rewards
Pros: Access to diverse pool of backers, good way to establish engaged customer base
Cons: Relatively slow process to accumulate funds
Popularized by platforms such as Indiegogo and Kickstarter . crowdfunding has evolved in the last couple of years into a viable funding alternative for those looking to start a business. Crowdfunding is a great option for entrepreneurs who may not have an established track record, but who can successfully demonstrate the viability of their venture or product to potential backers.
There are two main types of crowdfunding: reward- and equity-based. Reward crowdfunding allows entrepreneurs to receive financing by offering, say, a future product in return for capital. Equity crowdfunding allows entrepreneurs to reach investors interested in owning a piece of their start-ups.
Platforms such as SeedInvest and Crowdfunder allow you to offer equity to a pool of investors. Indiegogo and Kickstarter allow you to raise money from a pool of backers in exchange for a reward.
“Crowdfunding is an option that doesn’t look at your personal financial information at all and could provide cash for your business, particularly if it looks attractive but hasn’t hit the point where it is generating a lot of revenue,” says Gerri Detweiler, head of market education at Nav, a California-based company that helps entrepreneurs manage their business credit.
Repayment schedule: 6-12 months
Pros: Quick (if not instant)
Cons: Personal guarantee required (in most cases)
Borrow from cash you expect to receive in the future by promising the lender a predetermined amount of these receivables. Lenders provide you with operating funds in the interim, using your future expected cash flow as collateral for the loan.
The application process is much shorter than for a traditional bank loan. The lender will review your business’s cash flow and make a quick decision on whether or not to offer you financing. Online commerce platforms such as Amazon and PayPal offer such loans on an invitation-only basis. Online firms Kabbage and OnDeck also offer cash flow loans and require minimal paperwork.
“You can get funding in as little as 24 hours once you’ve submitted all of your documents,” says Lydia Roth, content manager at Nav and co-author of 11 Ways to Finance Your Business in 2016 .
A cash flow loan can be pretty expensive. Consider it only as necessary for unexpected expenses or a rare opportunity to purchase inventory at a steep discount that will allow you to earn a high return on your investment.