Image by: 401(k)2012
By Dexter Lunde
Starting your own business can be both exciting and nerve-wracking. More people are choosing to be their own boss. That means that you’ll be competing with more people when you need to go somewhere for funding. Luckily, there are more options than just going to a bank. A bank may be the most helpful but there are certain rules that you should follow if you intend on going to a bank for a loan. Let’s go over some of these alternative options and some of the tips for going to a bank for a loan.
Crowd-funding is when a group of people donate small amounts of money to an organization. This is a great alternative form of funding. If you’re interested in crowd-funding, look into the JOBS Act which will allow crowds to actually invest in the small company by using traditional equity models.
When you create an effective crowd-funding campaign, you should start off with/by:
1. Telling your story. This will help elicit customer engagement. As a general rule, people like to help underdogs, so tell them about the obstacles that are in your path and tell them about your influences. If you don’t have a good underdog story, then tell them the fact surrounding your business and yourself. Highlight and describe the problem. Make sure to emphasize your vision so that you’ll all be on the same page.
2. Go with “Supply and Demand”. Let them know about what the demand for your product will be and how scarce the supply of your product (in the market) is. This is important because it will help your potential investors see what the market for your product will be.
3. Make it an experience. If you can connect your product with an event that people can get excited about, do it: holidays, seasonal products, sporting events, conventions, festivals, etc. People like to be a part of something bigger. They like the feeling of being needed and the feeling of being a part of a large group. Build this relationship with them by rallying around an event.
These are important details in gathering supporters. Companies who can generate a good crowd-funding campaign average around $7,000.
Another tip is to make sure that you’re keeping an eye on your progress. Look at the percentage of funding that you gain in the first week. Statistics show that if you can gain about 30% of your goal in that first week, you’re more likely to succeed in reaching your target goal.
Lastly, don’t forget to interact with your investors and supporters after the campaign. Don’t just take their money and run. Make sure that you’re letting them in on future events that you host and that you’re giving them progress updates.
#2) Niche Alternatives
If you’re looking at a bigger goal, getting a small business loan from a bank sounds tempting. Getting a loan from a bank can be hard though. Because of that, you should try to look at niche alternatives first. What I mean by that is to look into your market (who your potential suppliers might be and the organizations for your business) and see if you can find a lending company in that niche.
An example would be Whole Foods (WFM) Local Producer loan program. They can help a culinary business start-up. Their interest rates can range from 5 to 9 percent.
Opportunity Fund is a California based microlender. They lend to about 1000 organizations a year and lend between $1 mil to $2 mill per organization. Tina Ferguson-Riffe got a $20,000 loan last year. Instead of paying back a fixed amount, she pays back a percentage of her sales, which means that when she’s having a really good month, she sends them more money and when she’s struggling, she sends them less.
#3) Lending from Banks
If you do find that you need to go to a bank for some funding, here are a few tips:
1. Let them know – beforehand – why your business isn’t a risky choice.
2. Show them your business model and show them evidence of steady, paying customers.
3. Hold off on going to a bank for the first couple years. Get some alternative funding going first and use that money to build a steady foundation of proven statistics, a good resume and background (for you and your business), a good history of paying off back loans or investors, and loyal customers. Use the bank’s loan to expand on your business instead of just starting one.
4. Before you apply for a bank loan, make sure that you’ve paid off your personal debt and try to get your personal credit score as high as you can possibly get it first.
#4) Angel Investors
An angel investor (or a “business angel” or “informal investor”) is basically just a rich guy (or gal) who provides capital for a business start-up. Now, in exchange for that money, the angel investor will normally ask for convertible debt (also called “convertible bond”, this basically means that after a few years the angel investor can trade these in for stocks) or ownership equity.
Because of the risk, angel investors normally look for investments that can return about 10 times more than their original investment to you. However, traditionally, angel investors will invest in a person (rather than just the business). In other words, they want to see YOU (and your business) succeed.
Where do you find them? Well, in the US, most angel funds are received in the great Silicon Valley (about 3-4 times more than the amount that is invested in New England. AngelList is a great website to look into if you’re interested in getting yourself an angel investor.
When you pitch your business, make sure that you convey your passion, make sure that your goals are clear, use a PowerPoint (I know that it’s old school but a 12-slide presentation is pretty traditional and it works), be prepared to answer any questions, and also try to come up with an exit strategy for your potential investor (it shows them that you’re prepared and consider different outcomes).