14 Creative Financing Methods for Startups

By Nicole Fallon Taylor, Business News Daily Assistant Editor
14 Creative Financing Methods for Startups

. / Credit: Financing Image via Shutterstock

For entrepreneurs with a lot of money saved up, the only obstacle to starting a business is coming up with a viable idea. But many aspiring business owners have the opposite problem — the idea is there, but the capital isn’t.

Clearing the startup financing hurdle is made even more difficult by the fact that brand-new entrepreneurs are often turned down for business loans. Traditional bank loans have always been tough to secure, and although loans funded by the Small Business Administration are typically more accessible, it’s getting more competitive: The SBA’s biggest lending program, the 7(a) program, recently maxed out its funds, and was on hold until July 28 after Congress raised the lending limit, ABC News reported. While business owners are in the clear for now, the growing number of SBA loan applicants means there’s a good chance of the program reaching its limits again.

So what’s a would-be small business owner to do? There are plenty of other options to help you fund your new venture. Here are 14 options beyond bank loans for financing your startup.

Editor’s Note: Need help finding a Small Business Loan? Fill in the following form for a quote.

What type of business financing are you interested in obtaining at this time?

Approximately how much money are you seeking?Are you looking for a loan for a business that you are about to start, a business that you already own, or a business you want to acquire?Why are you looking for business financing at this time?How long has your business been in operation?Do you have any credit issues which may impact the type or amount of financing available to you?What were your total business revenues over the past 12 months?What is the approximate total value of the assets you have to secure this commercial loan?Do you own a home or other personal real estate that could be used as collateral?Does your business currently accept Visa or MasterCard as a form of payment?If yes, please note your approximate monthly processing volume:What is your zip code?What is your email address?Please briefly describe the business and any further details regarding your financing needs. (optional)

Online lending. Recently, online lending services such as OnDeck and Kabbage have become a popular alternative to traditional business loans. Online lenders have the advantage of speed: An application takes only up to an hour to complete, and a decision and the accompanying fundscan be issued within days. In contrast, the traditional loan process can take weeks, or even months, to complete.Because of this, former U.S. Treasury Secretary Larry Summers said at the 2015 Lend It conference that he expects online lenders to eventually reach more than 70 percent of small businesses.

Factoring/invoice advances. Don’t want to take out a loan? Services like factoring and invoice advancing may help ease growing pains for small businesses. Through this process, a service provider will front you the money on invoices that have been billed out, which you then pay back once the customer has settled its bill. Eyal Shinar, CEO of small business cash flow management company Fundbox, says these advances allow companies to close the pay gap between billed work and payments to suppliers and contractees.

“By closing the pay gap, companies can accept new projects more quickly,” Shinar told Business News Daily. “Our goal is to help business owners grow their businesses and hire new workers by ensuring steady cash flow.”

Product presales. Selling your products before they launch is an often-overlooked and highly effective way to raise the money needed for financing your business. Entrepreneur Priska Diaz was able to raise $50,000 for her company Bittylab with a presale of her Bare air-free baby bottles. The money Diaz was able to raise helped her pay for inventory, and also helped to open some doors in retail and learn about her website’s visitors. Though Diaz was able to benefit greatly from this means of financing, there were still some difficulties to overcome.

“The biggest challenge was in coordinating the inventory delivery times from our supplier so that we could start fulfilling orders,” Diaz said. “Another challenge was forecasting the number of units we were going to presell, resulting in a shortage. We’ve now passed the presale stage and sold more than originally anticipated, resulting in back orders.”

Friends and family. If you have a friend or relative with some spare cash, you have another potential way to finance your business. Borrowing from friends and family presents an interesting alternative to traditional forms of financing, and can have some unique advantages, including low- or no-interest payments and avoiding the hassles of bank contracts.

Debra Doran, managing partner of the Seattle branch of financial consulting firmCTC Consulting | Harris myCFO, recommended open, frequent communication with potential friend and family lenders to avoid damaging relationships.

“Having a well-thought-out game plan will increase the odds of family members and friends agreeing to be your financial partners,” Doran said. “Business success is not assured, but by professionally approaching your family and friends to support your efforts, and communicating frequently on the progress of the business, the chances of maintaining good relationships are significantly higher.”

Side business. New business owners can try “double-dipping” as a means of funding their startup. Entrepreneur Alex Genadinik used his revenue from tours he organized on ComeHike to launch Problemio.com, which builds mobile apps for planning and starting a business. After receiving donations for some of the free hikes he led, Genadinik began to charge for events, where he marketed his new site to hikers.

“I tried everything else before that, including monetizing with ads and becoming an affiliate reseller for outdoor gear, but it didn’t quite work,” Genadinik said. “This allowed me to work on my project without the distraction of looking for investors.”

Home equity loan. For homeowners who have equity —the home’s value minus what you owe —a home equity loan is a great option for financing a small business. These loans generally offer interest rates that are both flexible and lower than traditional commercial rates.

“Home equity loans are very cheap, rate-wise,” said Al Engel, executive vice president of consumer lending at Valley National Bank. “It is a low-cost form of borrowing that is very controllable by the entrepreneur as far as when he pays funds and redraws funds. The flexibility is tremendous. The risk is, you are putting your home on the line. If the business fails, or you fail to maintain the terms and conditions of the home equity loan or line, you risk foreclosure.”

Selling assets. Sometimes, you may have a financing method and not even realize it at first. That was the case for entrepreneur Hamid Saify, who was able to fund his opinion-sharing community, ChoicePunch, by selling a car he had wanted to pass along to his children. Though it was a tough decision, Saify was able to make $30,000 from the sale of the car. That money, in turn, went toward some very important aspects of the fledgling startup.

“I used some of that money to help with the last payments to our design and development contractors,” Saify said. “The rest I put into our account and used to help support marketing during our beta launch months.”

Credit cards. Business credit cards are among the most readily available ways to finance a startup, and can be a quick way to get your business up and running.

“One of the few advantages is that the minimum payment on a credit card is very low,” said Ken Nickel, senior vice president of community lending at Valley National Bank. “If you are a new business who is just starting out and you don’t have a lot of money coming in, or you don’t have a ton of expenses, you can put it on a credit card and pay the minimum payment.”

However, there are some serious drawbacks to consider before using plastic to fund your startup, Nickel said. If a new business gets started and then has trouble making the payments, the interest rates and costs on the cards can build very quickly, and carrying that debt can be detrimental to a business owner’s credit.

Angel investors. Those looking to finance their business can always look to an angel —an angel investor, that is. Angel investors have helped to start up many prominent companies, including Google, Yahoo and Costco. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting a 20 to 25 percent return on their investment.

“The principal advantage of an angel investor is generally that you have a friendlier atmosphere and a quicker decision-making circumstance for a smaller amount of [money],” said Mark DiSalvo, CEO of private equity fund providerSemaphore. “You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in.”

Venture capitalists. For small businesses that are beyond the startup phase and already have revenues coming in, a venture capital investment may be appropriate. Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.

Brian Haughey, assistant professor of finance and director of the investment center at Marist College, said that because venture capitalists focus on specific industries, they can generally offer advice to the entrepreneur on whether the product is going to fly or what they need to do to bring it to market. However, venture capitalists have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window.

“They have to make a return and usually have a five-year time horizon,” Haughey said. “If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.”

Winning a contest. Sometimes, businesses can benefit from a bit of luck. That was the case for Roberto Torres and Luis Montanez, who funded a portion of their startup costs for apparel company Black & Denim with winnings from a business-plan competition.

“We utilized the funds to purchase manufacturing equipment that allowed us to scale our products and meet demand,” the owners said. “This advantage gave us the opportunity to increase our production and get into bigger players like Stein Mart and Walt Disney World. The competition also gave us access to business experts that asked us the tough questions while allowing us to retain our equity —a perk that would have been very difficult to obtain otherwise.”

Renting out your home. Cutting out liabilities is another creative way for new business owners to fund their startups. For Fay Johnson, founder and editor ofdeliberateLIFE magazine, that meant renting out her apartment. Johnson was able to do this by placing her San Francisco apartment on Airbnb and renting it out for anywhere between five nights and a month at a time. The decision has been successful for Johnson, who has used the money raised to fund the costs of the first few issues of her magazine. Though the move has allowed Johnson to finance her startup, it has not come without its share of headaches, including tight time restraints.

“As an entrepreneur, time is one of your most valuable resources,” Johnson said. “When renting, I have to keep in mind that I need to clean and reclean the apartment, and since I work from home, I also have to find a place to work during those days.”

Crowdfunding. Crowdfunding on websites like Kickstarter and Indiegogo can give a big boost to the financing aspirations of small businesses. These sites allow businesses to pool small investments from a number of investors instead of forcing companies to look for a single investment. Many sites allow companies to raise money in exchange for rewards or products. Others have anequity-based model in which businesses give up a bit of their share.

Before choosing a crowdfunding platform, be sure to read all the fine print and know what you’re getting into. Certain sites require businesses to raise their full stated goal in order to keep any money raised on the platform. Other sites will allow companies to keep any money they raise. Additionally, sites can claim a percentage of any money raised on the site. Sites often also charge a payment-processing fee for money raised.

Grants. If your business focuses on a scientific or research-oriented field, grants from the government may be able to help fund your company. The SBA offers grants through the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. Grant recipients are required to meet federal research and development goals, and to have a high potential for commercialization.

Shinar said there are not many downsides to a truly no-strings-attached grant. However, you should carefully read the fine print because grants may require that you give up part of the IT or other intellectual property, Shinar noted. Grants also can be time-consuming, and depending on the sector, the ratio of time expenditure to the odds of payout may be too high. Nonetheless, if your company could be eligible, it is wise to review the options.

Precautions and next steps

While the plethora of lending options may make it easier than ever to get started, responsible business owners should ask themselves how much financial assistance they really need. Companies that receive more income than they truly need should be prudent in how it is used. Shinar urged such companies to make — and stick to — a disciplined budget.

“It’s hard to go back later and try to exert fiscal discipline,” Shinar said. “It’s better to start from the beginning with good corporate governance.”

Companies that have received a large cash infusion may benefit from bringing in an experienced partner or board member to help ensure accountability, Shinar added.

As an alternative, bootstrapping your company — building it with existing resources and earned revenue — offers companies a low-risk way to test out their product. If you and your partners are able to work toward creating a functional product in your spare time, you may be able to begin to sell that product with minimal or no cash.

“The advantage of bootstrapping is that you stay the boss,” Shinar said. “More importantly, you get relatively quick validation from the market about whether you have a good business plan. Bootstrapping helps imbue a company with operational discipline.”

Owners who bootstrap retain exclusive control over their company for a longer time, allowing them to better influence its culture and goals. As your company grows, funds can be put directly back into enhancing the business, rather than into servicing your loans. In addition, they avoid less-than-favorable conditions and terms that might be imposed by lenders or additional partners.

If you bootstrap, however, be prepared and open-minded about moving to the next step. If you remain without external funding for too long, you may be unable to take advantage of market opportunities. Moreover, you risk creating a business that has failed to integrate more experienced minds.

“At a certain point, you need smart partners around the table, and those partners are commonly investors,” Shinar said. “If you want to grow really fast, you probably need outside sources of capital. And if you are only bootstrapping, you are missing some of the advantages of corporate governance. You may also miss some lifestyle advantage — you can go on bootstrapping for years without making money. So taking on debt may actually mean that your company can move forward.”

More information

Additional information about funding sources is available from the following resources:

Editor’s Note: Need help finding a Small Business Loan? Fill in the following form for a quote.

Originally published in 2011. Updated July 29, 2015. Additional reporting by Business News Daily contributor Katherine Arline and social media specialist Dave Mielach.

Forecasting Business Success Through the Lens of the Product and the Brand

Forecasting Business Success Through the Lens of the Product and the Brand
Image credit: Pixabay

Agency President, Author, Blogger, Professor

Good marketers conduct very thorough analyses when doing market research, product testing, branding perceptions and, of course, forecasting. Big businesses, especially those that are publically traded, spend significant time forecasting sales and measuring results against projections.

And while you may not have a board of directors or “The Street” asking you for a forecast, it’s important for small-business owners and entrepreneurs to also project ahead so that they can plan accordingly.

Related: 6 Ways to Make Financial Forecasts More Realistic

Now, I’m not going to share sophisticated forecasting models with you here – the true analytics vary by industry and category. But there is a mindset that I want you to adopt that will put you in the habit of continually forecasting for what lies ahead. And like all of our other topics in this series, we will take a look at that through the lens of both the product and the brand.

Forecasting the product (or service)

To manage your business effectively, you should understand the factors that will affect your product sales and plan accordingly. Anticipate their impact and map out a sales forecast that takes them into consideration.

If you are a real estate agent, for example, the kinds of factors that would affect your sales would be issues such as interest rates, changes in rental pricing, availability of new construction and the changing demographics of the area you serve. You should project out your anticipated home sales (and your resulting commission) as a result of these factors and how they may or may not be changing.

Forecasting the brand

Looking at your business forecast through the lens of just the product or service only paints half of the picture. How your customers and potential customers perceive your brand, relative to others in the same market, can have tremendous effect on your sales forecast.

Related: Sales Forecasting — by Reps, at Least — Is Dead

As a real estate agent, your reputation (or your “brand”) can have a tremendous effect on not only returning customers but also on new prospects as well. You business will thrive or dive based on your reputation so you should consider all of the things that could enhance or damage it. The reputations of other agents in your market can also affect your forecast, as you compete in the same arena for customer attention. Brand perceptions can be equally as impactful, if not more, on how well your sales progress.

All of this talk is only good if you do something about it by putting this analysis into action. Outline the factors that affect your forecast from both a product and a brand perspective and then develop an action plan for how you will make sure they affect your business positively, factor by factor.

Then, and only then, will you be forecasting for success.

4 Lessons That Nonprofits Can Teach Entrepreneurs

4 Lessons That Nonprofits Can Teach Entrepreneurs

Image credit: Charlie/Flickr

Nonprofits are often perceived as being less businesslike and bottom-line driven than their for-profit counterparts. But in reality, there’s no better model for learning how to cultivate passionate and loyal “customers.” Nonprofits are masters of engagement, often finding creative ways to do more with less. They also know how to spur their constituents to action, grow their support base and maintain those supporters for life.

Related: Should You Structure Your Business as a Nonprofit? 

So, whether your startup sells tacos or technology, your business may have more in common with nonprofits than you realize, how can nonprofits make your business better? Start with these four lessons about marketing your product.

1. Nail the value proposition

Best-in-class nonprofits make sure their donors can easily wrap their heads around where their money is going and what they will get for it. They really understand how to make their message resonate with their audience. Think about how powerful and effective the “for the price of a cup of coffee, you can feed one child” value proposition is. It brings us to a place of great perspective, motivates us and, in the simplest and most related way, illustrates the amazing impact one person can make.

Entrepreneurs, on the other hand, have a tendency to get too focused on product specs and features, and their messaging ends up in the weeds. I’m not saying you should ditch the product-punch list; but, instead, add a value element to it. This actually serves two goals. First, it forces you to you to define and promote the three-to-five key value messages that really resonate with customers.

Then, you can audit your own marketing and sales efforts to make sure the messages are being used in every available channel, from the website to sales scripts. By putting solutions in context and highlighting customer-oriented outcomes, entrepreneurs can deliver an equally effective, succinct and clear value to the market.

Related: How Your Business Can Build Lasting Partnerships With Nonprofits 

2. Research your constituents, not just your market.

Budgets are always an issue for nonprofits. Their lack of deep pockets often forces them to be more creative, wily and buttoned up. It also means they can’t afford to miss the mark when it comes to understanding their audiences.

Market research is just as important for nonprofits as for any other business – it’s the best way to understand what motivates their constituents, what needs they should serve and how they’re doing. Even large nonprofits such as United Way regularly check in to see which causes are most important to donors and volunteers, so they can market accordingly. Some of the organization’s recent research, for example, revealed that education is a top philanthropic priority for women, and guided them toward partnerships with local schools.

Even if you’re a budget-starved business, you can borrow a lesson from lean nonprofits by pairing free or low-cost quantitative tools such as Survey Monkey or Google Consumer Surveys with high-quality analysis or qualitative follow-up.

You can also form a customer advisory panel and solicit members’ research. Just don’t forego research altogether because best guesses can quickly lead you down a costly wrong path.

3. Use emotion to tell your story.

Nonprofits are renowned for humanizing stories and using emotive messaging and language to reach their constituents. The people, cause or issue takes center stage, and the organization follows. These organizations also never let you forget that there are people involved.

They keep their beneficiaries and benefactors out in front, making personal, memorable connections and invite individuals to share their own stories and images as a part of their campaigns. For example, the American Heart Association and American Stroke Association ask users to share their reasons “to live a healthier, longer life” by tagging social posts with #LifeIsWhy.

Even if your product or service doesn’t feel inherently emotional, embrace emotion as a marketing asset. Think about why you got into business in the first place, or why your first customer signed on. Maybe you are passionate about solving a problem no one in your industry had addressed, or your company found an unprecedented way to serve customers.

Stop talking about features and benefits, and message around the relatable emotion behind the problem, cost or pain that your solution addresses.

Then, start making and celebrating those emotional connections. Infuse human elements into your reporting and sales strategy. Take your buyer personas and case studies to a new level by centering on the “why” behind their motivations, inspirations and actions. Nonprofits nail this strategy, but so do several well known corporate brands that operate in the most mundane of categories, including UPS and Salesforce.

4. Create a clear and compelling call to action.

While nonprofit branding initiatives do exist, when they put energy into promoting their cause, you can expect a clear and timely “ask.” Every entrepreneur should have clear-cut calls to action for each target audience and make sure the entire company is trained on them.

Startups operating in emerging spaces, in particular, can’t rely on prospects to know what to do next, how to engage or even what to buy. They also can’t rely on the power of their brand to sell for them. They need to put forth a call to action that convinces prospects to take some type of immediate action.

How to get there? Sit down with your internal team and map out the actions you want your key audiences to take and the optimal touch-points to drive responses. Depending on the complexity of your solution, there may be more than one desired response, or even a series of outcomes that ultimately generate results for your brand.

The Red Cross engages both the donor and the recipient, pairing prominently placed calls to action such as “Donate Funds” and “Donate Blood” with other activities, such as training and “Get Assistance.” Use split tests to determine which call to action for your product or service is most effective.

Nonprofits and startups share many traits, including a need to creatively and efficiently market to maintain lifetime customer loyalty. Is your company implementing any practices born in the nonprofit world that should be added to this list?

Related: How a Creative Agency Became a Catalyst for Social Change