How to Get Funding for Your Startup Online
Banks have been reluctant to lend money to startups and small businesses, but that doesn’t mean funding is unavailable. The truth is, even before the financial crisis, banks were holding back. According to The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game, the economic crisis from which we are emerging only accelerated the banks’ reluctance to lend. But luckily for startups everywhere, the void left by banks has been quickly filled by online financing options.
These options fall into three categories: online marketplace lenders, rewards-based crowdfunding and equity-based crowdfunding. Deciding which one is right for you depends on:
- how quickly you want to scale your business
- the potential of the business
- the return on investment
- your competitive advantage
- your stage of business
- what you want to use the money for
- your management abilities
Let’s learn more about each of them.
Online marketplace lenders speed money to business but at a cost
Online marketplace lenders provide simplicity and convenience in applying, provide a quick decision on loan approval, speedy delivery of capital, and a greater focus on customer service. Many offer online and mobile applications that borrowers can complete in fewer than 30 minutes, compared to the 24 hours typical for the traditional bank application process, according to the Joint Small Business Credit Survey Report 2014.
Online lenders look at a lot more data about the company and are more flexible.
- They go beyond looking at profitability as a measure for cash flow. They look at the transaction history in a small business’ bank account, credit card swipe and shipment activity, and volume of invoices in accounting software programs.
- Collateral can take more forms than just a home, real estate or machinery. Some online lenders will consider luxury assets, such as a high-end watch or artwork.
- Even people with a low personal credit score may qualify for a loan from an online lender, if they have collateral or their business has cash flow.
Borrowers be aware: online lenders charge more to cover the risk they undertake. However, lenders such as CAN Capital, Dealstruck, Fundation, Funding Circle, Kabbage, Lending Club and OnDeck can be a good choice, depending on your needs. If you’re not sure if you want to go with a traditional or online loan, try online matching services, such as Biz2Credit, Fundera and Lendio, which will tell you which loan(s) you qualify for. For a deeper analysis, read Looking for Alternative Funding Sources? Go Online.
Rewards-based crowdfunding takes work but it provides debt- and equity-free money
Crowdfunding based on rewards provides debt- and equity-free money. You don’t need to give up a piece of your company in exchange for the money or pay interest on a loan. However, you do need to give something tangible in exchange for someone’s money. That could be pre-invoicing the product, selling it at a discount before it is manufactured, or offering a token gift, such as a t-shirt. Websites, such as Indiegogo and Kickstarter, coordinate the transactions.
Rewards-based crowdfunding is a stepping stone to other funding. Most investors want proof of concept before they ante up. A successful rewards raise impresses loan officers, angel investors and venture capitalists. It provides market feedback on product features and pricing, and engages customers and fans in the success of your company. But a rewards campaign isn’t just for startups. Rewards crowdfunding can also be used whenever a company is launching a new product.
Equity-based crowdfunding options are being phased in
The JOBS (Jumpstart Our Business Startups) Act was approved by Congress on April 23, 2012, with tremendous bipartisan support. The act provides a framework for private companies to market their securities via crowdfunding platforms. Since then, the SEC has been putting into place rules and regulations that will enable companies to raise money from people who may find out about a company’s security offering through a tweet, Facebook or an outdoor billboard. (I should point out that the term “equity crowdfunding” is something of a misnomer.) You can also do debt, revenue sharing or royalty agreements via some of the crowdfunding platforms.
Title II or Rule 506(c) of Regulation D was implemented a little more than 2 years ago. It allows a private company to publicly solicit and advertise its securities offering to accredited investors (a.k.a. wealthy people), via crowdfunding platforms such as AngelList, CircleUp, Crowdfunder and SeedInvest. To date, less than 2% of companies raising money from accredited investors have used Title II. As they say, the best is yet to come: Crowdfunding platforms are raising venture funds to invest in some of the companies that use their platforms. To learn best practices when doing an equity-crowdfunding campaign, read Equity Crowdfunding: Lessons From the Field and 5 Secrets to a Successful Equity Crowdfunding Campaign.
Title IV was implemented on June 19, 2015. Prior to that, companies needed to spend millions and deal with a correspondingly large amount of paperwork to do an initial public offering (IPO). Regulation A+, also known as a mini IPO, allows companies to raise smaller amounts of money (less than $50 million) directly from the public. A Mini IPO can be done in one of two ways. For either option, preparing filings requires effort and money, so very early stage companies are unlikely to use this method of fundraising.
To find out more about the two ways you can do a Mini IPO, read Raising Capital With a Mini IPO Under Regulation A+: Is It Right for Your Company?
Title III was approved by SEC on October 30, 2015, allowing companies to raise $1 million over a 12-month period. However, it will not become effective until May 2016. After that, a company can raise money from anyone, not just the wealthy, without spending or raising as much as they would on a Mini IPO. It’s ideal for startups. For an explanation of Title III’s impact on entrepreneurs and investors, read these two articles in Locavesting.com by crowdfunding pioneer, Sherwood Neiss.
Intrastate crowdfunding: Out of frustration with the amount of time it took the SEC to roll out Title III, nearly 30 states have adopted their own rules that allow intrastate trading. Most states have rules similar to those the SEC just approved for Title III, though some states allow companies to raise $2 million.
Financing your startup and small business has dramatically changed, but before you jump online, do your homework so you avoid making these five common fundraising mistakes.