Finding Funding: Alternative Options for Businesses
Many business owners, regardless of industry, are finally experiencing some moderate growth after years of recessionary conditions. Even the hardest-hit markets are starting to make a recovery. In this environment, many owners and principals may consider growing their companies, which often requires an infusion of capital. Although the traditional sources of funding, such as banks, venture funds, and angel investors, may be available, it may be time for some businesses to consider the alternatives.
Crowdfunding: This very recent addition to the funding marketplace is worth considering depending on the industry and customer profile of your company. Crowdfunding is a means of raising money for any venture or project including a business by allowing people to make small donations in exchange for a reward or benefit from your company. The rewards can range from getting a discounted service to having an opportunity to participate in the design of a new product. Previously this type of fundraising would have been a violation of state and federal securities laws, but a 2012 law—the JOBS (Jumpstart our Business Startups) Act—allowed general solicitations of funds. Once regulations have been issued, businesses will be able to sell shares to the public in addition to giving rewards. Hundreds of websites have cropped up to facilitate crowdfunding, but a few have risen to the top, with Kickstarter and Indiegogo leading the list. This funding mechanism is most successful with easy-to-understand businesses or those that have loyal customer followings. The most successful ventures that have used crowdfunding are those with wide crowd appeal, such as breweries, films, and other artistic ventures. The funding also brings attention from potential customers, business partners, and investors.
Although there are many success stories, there are just as many failures. One downside to crowdfunding is that there is usually a minimum raise requirement. If that minimum is not met then the entire funding initiative is wasted. This type of funding also lacks the vetting and expertise that comes with traditional funding. Crowdfunding relies on appealing to the masses, while loans and investor funding are based on a thorough due diligence of the business model. That due diligence can be very valuable to a new business but is mostly missing in the crowdfunding world.
Intrastate Sale of Shares: Several states, about a dozen at last count, have passed laws allowing sales of shares in companies to people within the state, without requiring a registration of shares or costly disclosure documents. Georgia’s law is called the Invest Georgia Exemption, and allows companies to raise up to a million dollars provided they meet all the requirements of “intrastate” businesses. Once again, several websites facilitate the collection of these funds from the public in exchange for a percentage of the funds collected.
Corporate Partner Programs: Several dominant players in the market have introduced funding programs to support and encourage smaller businesses that are part of their supply network. One example is the Whole Foods Local Producer loan program, which provides small loans to producers of local products. The program has given out over $10 million in the past seven years. Similarly many franchisers have also instituted in-house loan programs for franchisees in new locations. The loans, which are given to provide the majority of the funding that a franchisee may need to open a franchise, are easier to get since the franchisees have already been fully vetted prior to the loan process.
Microlending: Another option suited for the very small business owner is a microlender. Previously, microlending was associated with emerging countries but now several organizations provide loans in urban and rural centers throughout the U.S. The loans tend to be much smaller than traditional loans, ranging from as little as a few thousand dollars to up to $50,000. These loans usually demand an interest rate that is much higher than traditional bank loans but are still well below the payday loans or credit card loans that may be available to this segment of the population. Grameen Bank, which revolutionized the lending industry in Bangladesh with its microcredit program, is also leading the pack with Grameen America, which is now in six U.S. cities, with six branches in New York City alone. These microlenders often provide their borrowers with other services like financial literacy classes and workshops on establishing business credit.
While banks are increasingly loosening their credit and providing more loans, they still require the borrower to have a proven operating history and financial stability. Alternate lending structures can be a viable option for small and new business owners that don’t meet the banks’ criteria and are looking for funding in 2014.
Sonjui L. Kumar is a founding partner of KPPB Law and focuses her practice on serving as general counsel to closely held companies and succession planning for family and closely held businesses.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
Enjoyed reading Khabar magazine? Subscribe to Khabar and get a full digital copy of this Indian-American community magazine.
