2013, Volume 1, Number 3
Gone are the days when entrepreneurs had to rely only on large banks to secure a loan to start or grow a business. Often times this lack of access to capital presented great hurdles to would-be business owners with less than stellar personal credit. Today there are a wide variety of creative funding sources available to budding entrepreneurs, and more are appearing every day. Below is a short list of some of the most compelling and accessible options open to women business owners today.
These are lenders that lend to businesses that would otherwise be rejected from a traditional bank loan but that have a functioning business. Small business owners may be rejected from traditional bank because of poor personal credit, lack of financial documents such as tax returns, lack of or poor past sales data, home-based business, and small value of loan requested. Alternative lenders often look past traditional lending criteria and instead look at a variety of different things to qualify, some of which are:
- Collateral: Personal property of value that guarantees the loan.
- Cosigner: A second person that agrees to be responsible for the loan should the primary signer default.
- Site visits
- Bank statements
- Sales receipts
- Accounts receivable (contracts signed)
Since alternative lenders often have to incur higher costs to service borrowers with less documentation and lower values of loan requests, their interest rates tend to be a bit higher than traditional lenders. That being said, after accessing capital via alternative lenders, they often offer clients networking opportunities and technical assistance.
Crowd funding is basically the use of a platform to collaborative fundraise online. There are two main forms of crowd funding campaigns: donation-based and investment-based. Donation based campaigns allow small businesses to raise money for any need in exchange for acknowledgement, rewards, or perks. Investment-based campaigns asked people to give money in exchange for either equity or debt stakes in the businesses. This model gives investors the potential for a return on investment instead of just a prize or thank you. Two of the most popular crowd funding sites are Kickstarter and Indiegogo. Two sites specifically tailored to the small business owner are Fundable and Crowdfunder. Using crowd funding can be a very effective way of raising much needed capital, but be sure to do your homework before starting and remember that any campaign takes effort to promote!
Incubators support entrepreneurs with start-up funding, office space, and technical assistance. There are a wide variety of incubator models that focus on a wide variety of industries, but many of them today are geared toward the tech industry. The incubator space itself has grown from only 12 in 2000 to several hundred in 2013. Participating in an incubator program is likely to increase the chance of business success due to the intense and expert mentoring each small business owner receives during their tenure with the incubator. That being said, most incubators are very competitive to get into and many require at least a 4-6% equity stake in the business upon completion of the program.
Peer to Peer Lending
Online platforms that allow people to lend money to other individuals without going through traditional financial institutions; employs credit checking tools. Most of these loans are personal unsecured loans. Interest rates can be set either by the lender themselves or by the hosting platform. Two of the most popular sites for peer to peer lending are Prosper Marketplace and Lending Club. As with crowd funding, before using peer to peer lending do your homework, read reviews, and know that there is risk involved.