When small businesses need a capital infusion, owners typically first turn to their banks. But there are plenty of other places for small businesses to get the money they need. Here’s a rundown on some alternative sources of capital.
Venture capital firms take investors’ money and put it into promising businesses in hopes of helping them expand and succeed and thereby generate good profits for the investors. You can find venture capital funders through online networking sites such as FundingPost or the National Venture Capital Association.
Obtaining funding from venture capital firms isn’t like getting a bank loan. VCs will want an equity stake in your company and often demand a seat on your board and a say in your business strategy. While some owners bristle at the heavier touch, many businesses benefit from the expertise and experience VCs bring to the table.
Read The Structure of a Venture Capital Investment for more information.
Angel investors are simply wealthy individuals looking to invest money in businesses in hopes of getting high returns. Like venture capital firms, angels often want to share their business expertise with you, not just their money. They typically invest smaller amounts than VCs and are usually more flexible in their terms and demands.
Network in your local community to locate angels interested in your type of business, or find local angel investor groups through the Angel Capital Association.
If your business accepts credit cards or you bill clients, there’s a delay between when the sale is made and when you get paid. If you need the cash faster, you can sell your receivables to a specialty lender.
This funding method, known as accounts receivable financing, or factoring, will cost you anywhere from 1 percent to 5 percent of those receivables you finance. In exchange, the factoring agent gets the right to collect the full amounts you’re owed as the payments roll in. The good news is, it’s not a loan you have to pay back; it’s essentially an advance of your own money.
Read Accelerating Cash Flow with Factoring Services for more information.
If you purchase supplies or merchandise from vendors, you have terms: the amount of time you’re given to pay the bill. One simple way to improve your company’s cash flow is to ask your vendors for extended terms. If you’ve been required to pay within 30 days, and you get a new deal to pay in 90 days, that’s two more months you’ll have to sell the goods before your bill is due. Then you can pay the vendor off with your customers’ money, just like all the big retailers do.
Read Tips on Obtaining Vendor/Supplier Financing for more information.
This relatively new Internet-based source of loans matches up individual investors to individuals or companies seeking funding. The sites, including Prosper.com, Zopa, and Peer Lending Network, run credit checks on prospective borrowers and disclose that information to lenders. Interest rates vary depending on your credit value and the interest lenders take in your story. The site takes bids from lenders and then packages the loan at the lowest rate the group of interested lenders is willing to pay. The funds available are substantial. For example, Prosper.com has midwifed loans for $178 million since launching in 2006.
Read Is a Peer-to-Peer Loan Right for You? for more information.
A hedge fund is a private investment portfolio that has few restrictions on the types of assets it can invest in so it uses a variety of aggressive, high-risk strategies to get higher returns. It may be a bit of a long shot, but recently some hedge funds have begun providing short-term business loans as a way to diversify their holdings. Be wary if you approach these firms, as they may charge high interest rates.
Business reporter Carol Tice contributes to several national and regional business publications.