Finance. It’s a scary word for most people.
Whether it’s paying your bills each month or saving up enough for that dream vacation, none of us can claim to be immune to the chokehold that the big ‘F’ word has on us. Finding the right financing for a business idea is an especially tough challenge. Not only do you have to be convinced about your project, you also need to convince some pretty hardnosed bankers about how viable your idea is.
All hope is not lost. Here are some ideas on how to raise financing for your business idea when a loan is not an option
Approaching a bank for startup financing is pretty straightforward. Get your business plan in place, calculate how much you’d need by way of a loan and put on your best suit to impress those bankers. However, not everyone has the luxury of being eligible for a business loan. Poor credit histories, not enough collateral, an unsteady source of income are but a handful of the many reasons bank loan applications get rejected every day.
But all hope is not lost. Here are some ideas on how to raise financing for your business idea when a loan is not an option.
1. Business Incubators
It’s good to have money to pursue your business interests, but it’s even better when that money comes with some solid mentoring to help take your business off the ground. A business incubator offers just that. A business incubator is an organization that provides a readymade set of resources for early stage startups to set up and roll out.
These resources include infrastructure like office space, computers, internet connections, conference rooms, support staff that take care of things like payroll and maintenance, and administrative jobs combined with guidance from qualified mentors on how to grow the business.
The fact that a number of businesses operate under the same roof offers networking opportunities and growth spurts for many startups. Most business incubators also dip into their own network of business associates to help their members accelerate their growth curve. In return for all their assistance, the business incubators either pick up a stake in the company or charge a monthly fee that covers rent, services and mentoring.
Many large universities boast of on-campus business incubators that bring their students’ entrepreneurial dreams to life. Y Combinator, Houston Technology Center and the Palo Alto Research Center (PARC) are some of the best business incubators around. The National Business Incubation Association also has a handy search engine to locate a business incubator near you – any country or state.
2. Vendor Financing
Now this is the exact opposite of customer financing. Instead of going to your customers and asking them to shell out some moolah for your business, you approach your suppliers and ask them to give you a loan so you can carry on business as usual.
These loans are usually given at interest rates that are much higher than bank rates, since the companies that opt for such loans are not very credit worthy. A vendor would extend such a loan only if he knows the business from close quarters and expects the value of the business to go up in the near future.
Sometimes vendors opt for a stake in the startup in return for offering funds as working capital. This scenario usually plays out in high growth sectors like technology or bio-sciences. Another alternative mode of vendor financing is when the vendor allows a startup to buy supplies from them for payment that is deferred to a much later date than the usual credit period.
Often this deferred payment carries with it an interest rate that would otherwise not have been applicable. This version of vendor financing works in case of startups that have only one or two large vendors whom they buy supplies from.
Since there is always the threat of the startup shutting shop and being unable to repay the vendor at all, this form of financing is hard to come by and only happens when there is a strong relationship between the vendor and the buyer in the first place.
3. Business Plan Competitions
Remember those competitions in school where you had to come up with a ‘business idea’ to raise money for some charity or another? While most of us ended up setting up lemonade stands or selling cookies outside stores, a select few actually made fortunes for their causes from these little ventures.
It would be a mistake to dismiss the idea of entering a business plan competition to win some much needed funds for your startup. In fact, this is a fantastic way to not just test the strength of your idea and learn from judges’ inputs about how you can make it better, it’s also a no-strings attached way of picking up a decent payday for your bright business idea.
The average business plan competition offers prizes of tens of thousands of dollars to the winner. Most such competitions only allow entries from brand new businesses that have just started off or those that are still in the pipeline. Some of the leading business plan competitions that reward enterprising new business ideas include the MIT GSW Business Plan competition and the DEW Startup and Pitch Competition. Check out BizPlanCompetitions to find more competitions near you.
4. Mortgage Property
You have built up assets like an apartment, house, ranch (!) or any other property to be used as a source of income when you really need one. Selling fixed assets is a good option to raise money for your business, but that means you are destroying an asset you carefully built up in order to finance a business idea that may or may not succeed.
This is usually not the smartest of moves. Instead, most savvy startup entrepreneurs consider getting a mortgage on their fixed property in order to fund their business plans. Most mortgages offer funds up to 70 to 80% of the value of your property.
The benefit of this is that you enjoy lower rates of interest as your property is kept as collateral with the lender. You don’t lose any stake in your business and have zero interference in running your business from any third party, like in the case of an angel investor, VC or business incubator.
The best part? You can choose to set your own repayment date based on the value of the property, instead of being forced to pay up quick by other creditors.
5. Angel Investors & VCs
OK, Angels and VCs aren’t exactly “unconventional” sources of finance; however, since they’re the first stop for most startups seeking funds, you need to approach them in an unconventional way.
First of all, you need to be clear about the difference between Angel Investors and Venture Capitalists. Both angel investors and VCs offer funding at various stages of a startup’s lifecycle in return for a stake in the business. Both scrutinize the business plan, the projected returns on investment and the probability of breakthrough success for the business before putting down any money.
Where they differ is while the former are typically individual investors who dip into their own savings to invest in your business; the latter are businesses in themselves which have a single purpose – maximize the returns on investment.
Funding amounts can range from a few thousand dollars to millions
Funding amounts can range from a few thousand dollars to millions in the case of angel investors. Venture capitalists typically offer funding in the range of a few million dollars and can even come back for multiple rounds of funding when they see strong growth potential for their investments.
Here’s a geographical listing of angel investors across industries. Alternately, you can check out CB Insights’ list of top 20 angel investors for 2014. Venture capital firms now face tough competition from large technology companies like Google, Samsung and Cisco that have created their own in-house VC divisions.
Most entrepreneurs bootstrap their way into business or take huge loans from friends and family, putting the finances of their family and themselves at risk in the process. By putting some distance between yourself and your source of funding, you not only mitigate personal risk, you also open your business up to a much larger funding pool than ever before.
Have any unconventional funding ideas of your own? Share them with us, we’d love to hear from you!
Tracy Vides is a writer, researcher and content strategist, who firmly believes in the power of communication, collaboration and social media to leverage small business! She’s @TracyVides on Twitter.