Tuesday, October 8, 2013

Financing Options: Crowdfunding to Loans

This is such a big subject and getting bigger each day so we'll try to give you the highlights. If you are looking for further detail, please let us know.

While traditional banking and equity investment through private equity investors are still very much alive and kicking, there are many other "creative" methods of raising funds for your business.

 

Crowdfunding has been getting a ton of attention lately with Kickstarter and Indiegogo showing off many funding successes. One thing to remember is that this space is a real moving target. With rules and regulations changes coming from the SEC, we may be seeing different players, or at least different looking players, in the near future. Two types of crowdfunding appear to be emerging: peer-to-peer and donation/purchase-based.

Peer-to-peer crowdfunding sites currently include ones like LendingClub.com and Prosper.com.  These organizations operate as matching sites, bringing together individual member lenders and borrowers. Many provide quick response to requests for funding and interest rates can be significantly higher than other sources of funding. If you are having troubles with other avenues of borrowing, read all the fine print before making a decision, on either side of the transaction (this goes for all of the options discussed here).

With donation/purchase-based websites like Kickstarter and Indiegogo, you get to operate as a fundraiser or as a place to take pre-orders for your product or service. Many artists and non-profits like this space as well as businesses. There are a couple of keys to raising funds on one of these types of sites: have an awesome network, create a compelling story and offer desirable "perks". You pretty much will need all three components to have a successful campaign. And a great video really helps too!

Other funding sources include credit card advances and factoring can help with cash flow issues. While these avenues may help with daily or weekly cash flow, the cost of capital can be quite high when compared with other options. With credit card advances, they may hold back as much as 20% until the customer pays and it doesn't improve your business credit (which is important in getting future business loans). If you have inventory or accounts receivable, then factoring may be an option, but again this option can have a high cost of capital.

Another funding option is a short-term business loan. Usually these non-bank operations offer loans based on personal credit, annual revenue and time in business.  Many loans can be made up to $250,000 and have terms from 3-18 months. If you qualify, you can get decisions typically within one day. And like the other solutions above, the cost of capital is high and there are no guarantees and you have to read the fine print. A good business situation for this type of product would be where a supplier is offering a significant discount on a large shipment of regular inventory items that you know you can turn very quickly yet you don't have the cash flow to cover a large purchase. The discount would help offset the high cost of capital.

While there are no easy solutions to finding funding these days, there are still many options. It's all a matter of which one best fits your needs. Need help deciding which one to use? Give us a call at 775-283-7122 to set up an appointment and we'll help you with evaluating what works with your plan and your business.

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