Expanding Beyond VC: Navigating Alternative Funding For Small Businesses
CASH IS QUEEN! Yes, cash is the lifeblood of our business.
The bad news: Not every small business owner is able to bootstrap a business and capital from additional sources is a must.
The good news: The government is aware and has been intentionally trying to address the gap in access to funding for all small business owners.
The Biden-Harris administration invested $10 billion, through Treasury’s State Small Business Credit Initiative, to expand access to capital and invest in early-stage businesses in all 50 states!
In addition, the SEC Investor Advisory Committee reached out and invited me to speak on my recommendations on:
🤞 Potentially expanding the accredited angel investor definition;
🤞The risks, and unintended anticipated consequences of expansion; and
🤞Other general considerations.
It was a career honor and privilege to be invited into an incredible, engaging discussion with various different (which, by the way, I think is imperative for the most effective path forward) viewpoints shared.
After the discussion and extensive research on the latest statistics, something that became very clear, small business owners need to be aware of alternative capital-raising methods that you exist other than the more well-known “venture capital” path.
Why I think it’s imperative for small business owners to explore alternative fundraising methods outside of VC:
I strongly believe that venture capital is not enough to drive economic growth for small businesses – especially for those early-stage businesses.
I am always curious if you, a small business owner, raise capital, what sources will you use (or have used)?
What I recommend you also explore:
Here are some alternative capital-raising methods that you want to check out other than the Venture Capital route:
REVENUE-BASED FINANCING
What is it? Revenue-based financing (also known as ‘Royalty-based financing’) is when investors agree to provide upfront capital to your business in return for a certain percentage of your business’s ongoing total gross revenues.
How can it help you? Revenue-based financing:
- provides you with a flexible financing option without the need to give up equity in your business.
- is particularly beneficial for you if you have consistent revenue streams but may not have significant assets or collateral.
What helps you to get funded using this route? You can apply for revenue-based financing by demonstrating your:
- revenue history
- growth potential
- repayment capability
Examples of companies offering this kind of financing are Kapitus and Outfund.
CROWDFUNDING
What is it? Crowdfunding is popular for startup companies or growing businesses. It involves raising capital by getting small amounts of capital from a large number of individuals or investors through online platforms. Various models include:
- Rewards-based crowdfunding
- Donation-based crowdfunding
- Equity-based crowdfunding
- Debt-based crowdfunding
How can it help you? Crowdfunding allows you to:
- access capital while simultaneously validating your product or idea in the market
- be exposed to the market and potential customers (a big PLUS)
- Leverage your own network who wants to support you
What helps you to get funded using this route? You must create compelling campaigns on crowdfunding platforms, clearly outlining your:
- business idea
- value proposition
- why people should invest or contribute to your business
Examples of companies offering this kind of funding are Kickstarter and Indiegogo
LINE OF CREDIT
What is it? A line of credit is an arrangement between you, a small business owner, and a financial institution – usually a bank that provides you with a predetermined amount that you can borrow. With a line of credit, interest is only charged on the amount borrowed and you can pay it immediately or over time in regular minimum payments.
How can it help you? Line of credit can:
- Provide you with a safety net for cash flow fluctuations.
- Help you cover short-term expenses.
What helps you to get funded using this route? Typically, you apply for a line of credit with banks or alternative lenders. You need to provide:
- financial statements
- Business Financial Plan
- Strategic Plan
- Other documents that show your ability to repay.
Examples of companies offering this kind of funding are BlueVine and Fundbox.
PURCHASE ORDER (PO) FINANCING:
What is it? Purchase order financing involves three parties: you, a supplier, and a third-party lender. The third-party lender will finance the supplier to cover the full (or partial) cost of your specific purchase order.
What helps you to get funded using this route? It enables you to accept larger orders than you normally fulfill, helping you seize growth opportunities without waiting for your customer payments.
What helps you to get funded using this route? You need to demonstrate:
- the viability of the purchase order
- your ability to fulfill it,
- the creditworthiness of your customers
Examples of companies offering this kind of funding are NOW and Behalf, altLINE, PurchaseOrderFinancing.com.
ANGEL INVESTORS:
What is it? An angel investor is a private individual who provides capital to businesses, including startups, usually in exchange for convertible debt or ownership equity.
How can it help you? An Angel Investor investment is very important to small businesses, especially in the early stages when other sources of financing may be unavailable or difficult to access. Additionally, angel investors can often bring valuable expertise, mentorship, and networking opportunities to the businesses they invest in.
What helps you to get funded using this route? To attract angel investors, you need to:
- Present a compelling business plan or pitch that outlines your:
- unique value proposition
- market opportunity
- competitive advantage
- growth potential
- financial projections.
- To demonstrate a clear understanding of their target market, scalability, and the ability to generate returns for investors
- Connect with potential investors by:
- Attending angel investor networks
- Attending pitch events
- Leveraging personal connections
Examples of companies offering this kind of funding are AngelList and Gust.
BOTTOM LINE:
So, in a nutshell, while venture capital is a big deal for getting large amounts of cash, there are other viable ways for small businesses to fund their capital needs outside of VC.
Take revenue-based financing, for example. It’s like getting money without giving away parts of your business. And crowdfunding? It’s not just about raising funds; it’s also about showing off your awesome idea to the world. Then there are lines of credit, which are like safety nets for your cash flow ups and downs. Purchase order financing? It’s the ticket to fulfilling big orders without stressing about money. And let’s not forget angel investors – the unsung heroes of early-stage businesses, whom you can secure funding while gaining invaluable mentorship and networking opportunities. So, whether it’s revenue-based financing, crowdfunding, lines of credit, purchase order financing, or angel investors, exploring alternative funding methods empowers you to chart your own path to success.
Knowing and understanding those alternative capital-raising methods should immediately help to realize that you have greater flexibility in how you finance your capital needs; you CAN maintain control over your business, retain ownership and autonomy; and you do indeed have a wide range of financing solutions that can be explored based on your specific needs and business financial goals.
Do you want more funding options that suit your needs as a small business? Check these 10 ways to fund your startup now!