ALTERNATIVE FUNDING OPTIONS TO THE RESCUE
Looking for money to start up or expand your business? Due to a variety of reasons, many traditional funding sources may not be available to you at this time. Consider some new ways to raise the capital you need.
Small business owners may be at a loss to find capital at this time. Their personal resources, such as home equity, have been drained. Perhaps their FICO scores have been injured during the recession, making it difficult to obtain SBA loans or other traditional financing. There are a couple of new options to consider.
Crowdfunding
Try social media sites to raise small amounts from a large number of people. Crowdfunding, which has been called the democratic process of fundraising, is a growing financing option. It started a few years ago as a way to fund certain artistic projects; it has expanded to the small business community in general. Funding through these sites typically is small, under $10,000, but there is no fixed limit and some sites are now facilitating funding of $50,000 or more.
Businesses interested in obtaining funding through crowdfunding post their needs. Then, individuals make contributions. Sites set funding goals for posted projects and, on some sites if the goals are not met, the pledges or contributions are returned.
Contributors may receive nothing other than the satisfaction of helping a worthy project get off the ground. Or they may receive a cut of revenues for a fixed period of time.
Resources:
Royalty funding
This is debt financing where the borrower pays back the loan using a percentage of the business' revenue. Royalty funding has been used in certain industries, such as film production and mining, as well as technology, but could be used for a business in any industry.
You can arrange your own royalty funding by setting up a repayment agreement structured with revenue payments. Usually, the repayment is 2% to 6% of revenue over a fixed period, such as four years to six years. Alternatively, the lender can be repaid a set multiple of the investment.
The main advantage to royalty funding is that the company is essentially taking a loan, so there is no loss of equity. The chief downside to this type of funding is the drain on cash flow to service the revenue payments.
For large borrowing ($500,000 and up), instead of seeking venture capital, you can turn to a growing number of firms (Arctaris Capital Partners LP, Cypress Growth Capital LLC and Revenue Loan LLC) that have been created to provide royalty funding.
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