Many small businesses fail within the first
two years. For the most part, this does not occur due to low-quality
products or services or poor ideas. Rather, this tends to happen as a
result of insufficient funds. Running a business can be expensive and it
usually takes some time for a business to establish its operations and
build a market presence before it can become marketable. Traditionally,
entrepreneurs have relied mostly upon six sources for their business
funding needs:
- Dipping into personal savings
- Getting a bank loan
- Using credit cards
- Finding investors
- Inheriting a fortune
- Winning the lottery
However, while you may have a great idea, you may not be able to rely
on these sources for all of the funding you need. Thankfully, some
other financing options are available. Some of these options come as a
result of new technological and social developments while others come as
a result of good, old-fashioned ingenuity.
Sell Now, Produce Later
If the product or service you intend to provide is something
revolutionary that your target market can easily see as being valuable,
you may be able to sell it before you even produce it. Use Internet
resources like databases and business listings to build a list of
prospective buyers and then contact these buyers. Prepare a sales
presentation that gives details on product design, function and price
advantages. Encourage buyers to pay up-front – at least in part – to be
first in line to receive the product. One option is to charge a
refundable reservation fee. The problem with this option is that you
cannot simply go and spend all of this money on the business, as you
will not be able to repay people who request refunds. However, you can
use some of it and having these resources can add legitimacy to your
business that can help to attract investors and lenders. If your company
offers services rather than products, selling preemptively may not be a
problem at all.
Product Crowdfunding
The normalization of Internet access and the development of
Internet-based technologies has led to a new way of selling now and
paying later – crowdfunding. Through crowdfunding platforms such as
Kickstarter, Rockethub, Indiegogo and Appsfunder, you can create a
product-based pitch that will allow you to sell your product before it
even exists. However, your crowdfunding campaign must abide by the
guidelines specific to each service. For instance, Appsfunder is
specifically for the funding of mobile device applications, while
Kickstarter is only for creative projects located in the United States.
To be successful, a crowdfunding campaign usually requires a dedicated
and extensive social media campaign to go along with it. Also, whatever
you are trying to crowdfund should be something that people see as
exciting. For example, if you intend to import stainless steel ladles
from China, this is probably not something that you could successfully
crowdfund. However, if these stainless steel ladles have Darth Vader
handles, you may be able to get a bunch of Star Wars fans excited enough
about them to give you money.
Equity Crowdfunding
It used to be illegal to use crowdfunding methods to sell stock in
new companies. However, thanks to the JOBS Act, business equity
crowdfunding is legal under certain conditions (as of early 2013). This
can be a very effective way to raise the funds necessary for your
venture. However, it is not a magic bullet. A number of regulations
still apply, necessitating legal fees for things like the drafting of
disclosure documents by a lawyer. Bear such legal fees in mind when
calculating your expected business expenses. And again, when it comes to
crowdfunding, remember the key principle: excitement! As with normal
attempts to raise business equity, people’s ability to profit from
investment is something that will motivate them to give you money.
However, crowdfunders are also looking to get involved with something
shiny, new and revolutionary. Show them how your company will bring
change to the industry or to society in general.
P2P Lending
Companies like Prosper and Lending Club are to debt financing what
crowdfunding platforms are to equity financing. Person-to-person lending
platforms allow you to post a loan request listing that details the
specifics of your cash needs. Individual lenders may contribute to your
listing with the understanding that you will pay them back plus
interest. In some cases, if you have been turned down by a traditional
business loan from a bank, you may be able to get a business loan
through an online P2P platform. To do so, make a listing that conveys a
sense of legitimacy, stability and professionalism on behalf of your
business. Show prospective lenders that you will use their money wisely.
Using All Options
Finding a non-traditional way to fund your business is not a matter
of picking one item from a list. You may use all or none of these
methods, and using one may increase your ability to use another. For
instance, if you have received 100 product reservations of $1,000 each
from customers, this will increase your ability to raise money through a
P2P loan. Be inventive and industrious, and one success can lead to
another.
