After some bumpy years, there are more sources of funding than ever for small businesses. Here’s where to look.
It’s getting easier to find money for your small business.
Compared with a few years back — when credit markets froze, venture capitalists went on hiatus, and people’s stock portfolios took a hit — there are more funding options than ever for growing startups. As the economy has recovered, a plethora of incubators and crowdfunding sites have also emerged, providing brand new ways for aspiring entrepreneurs to raise cash.
If you want to turn your idea into a business, or need more funding to take your venture to the next level, here’s a look at five sources of capital. The information comes from three financial experts who recently spoke on the topic of “getting money for growth” at WomanCon, an event for female entrepreneurs in New York.
1. Friends and family. Without a doubt, most entrepreneurs turn to neighbors, old classmates, relatives or other loved ones when looking for seed money. The option has become popular again as people’s home values, market investments and retirement plans have stabilized. That said, make sure you’re committed to your venture before approaching people you know — and make sure your loved ones won’t take a financial hit if your startup implodes. “When early-stage entrepreneurs come to me….I always ask: Do they have friends and family [who can help], and can they sleep at night, taking money from those friends and family?” says Lori Hoberman, who heads up Chadbourne & Parke’s emerging-companies/venture-capital practice in New York. The money can be structured as a loan or a gift, or you might give the friend/relative a small amount of equity in your company, she says.
“You have to be of the mindset that someday you’ll want to exit your company” — Peggy Wallace
2. Incubators and accelerators. In recent years, business incubator and accelerator programs designed to help early-stage companies grow have proliferated, says Kay Koplowicz, co-founder of Springboard Enterprises. Generally, startups accepted into the programs get office space, mentoring and a small amount of seed capital, typically in the range of $20,000 to $25,000, while the program organizer takes a chunk of equity in the 5% to 8% range. The application process, especially to well-known programs like TechStars and Y Combinator, can be highly competitive, and women are generally under-represented, perhaps because of the focus on tech. Programs specifically for women include Springboard, Women Innovate Mobile and Astia.
3. Angels & venture capitalists. This type of financing is appropriate if your high-growth startup plans to one day have an initial public offering or a sale. “You have to be of the mindset that someday you’ll want to exit your company,” says Peggy Wallace, portfolio manager for Golden Seeds, which invests in early-stage companies that typically have a woman CEO or founder. Many entrepreneurs work with angels, or high-net-worth individuals, in the beginning, then ultimately try to raise larger rounds through venture-capital firms. Thanks to recent changes in the general solicitation law, entrepreneurs seeking to raise money can now publicly advertise their efforts, although you still can only take money from accredited investors. Sites like AngelList connect startups with investors, while entrepreneurs can meet angels in person by attending programs sponsored by accelerators, incubators, universities, Meetup or nonprofits like MIT Enterprise Forum.
4. Crowdfunding. It’s possible to raise a sum of money for your business through donation-based crowdfunding sites like Kickstarter and Indiegogo, where you post a high-quality video about your business concept and promise token awards (like a coffee mug or t-shirt) to anyone who “invests” in your idea. Currently, U.S. regulators are hammering out rules that would allow equity crowdfunding, in which a startup could potentially sell shares to a large pool of investors. “It’s a time of great change,” Wallace says. Entrepreneurs considering this route, when it’s allowed, should know as much as they can about potential backers and understand the terms, such as whether investors get voting rights, she advises.
5. Loans. If you’re looking for a loan, a good place to start is the SBA’s flagship lending program for small-business owners, called the 7(a) loan program. Over the past four years, the agency has guaranteed more than $106 billion in lending to more than 193,000 small businesses — although that number has declined in recent years as stimulus efforts have expired. Before taking on debt, “make sure you’re not putting yourself into great financial distress,” Wallace says. Also, consider whether you might want equity financing instead. Sometimes, women are automatically steered toward SBA loan programs, which might be appropriate for a business with limited potential for growth — say, a local restaurant or consumer-product company, she says. “When women start businesses, the term ‘small business’ is usually used,” Wallace says. “Broaden your horizons.”
Posted: September 30, 2013