Regardless of the stage it is in, every business needs capital to survive. Businesses need capital to launch, grow or simply operate. When launching a new business, statistics show that most entrepreneurs rely on bootstrapping to secure the startup or seed capital they need. Typical examples of bootstrapping include using capital from personal savings, retirement accounts, bank loans, credit cards or friends and family. While venture capital and angel investors get a lot of media attention, in reality, only a small percentage of new businesses are launched with this type of outside investment.
In looking at traditional business funding sources such as bank loans, lines of credit or outside investors, many entrepreneurs find them too rigid. In other words, if the entrepreneur or the business don’t fit a particular mold, then securing funding from these sources is not likely to be successful.
Fortunately, in today’s innovation-driven environment, new business funding options that are more responsive to the needs of founders and entrepreneurs, are emerging. Below is an overview of some of the new trends in business funding that could gain traction in 2019 and beyond.
- Crowdfunding: Crowdfunding became a viable funding option for startups and existing businesses in 2012, through the Jumpstart Our Business Startups (JOBS) Act, which legalized equity crowdfunding. And although there has been huge growth in the crowdfunding scene, with an average raise of about $7,000, it has not yet become a major source of business capital.
- Peer-to-Peer (P2P) Lending: Through this relatively new business funding model, business financing is funded by investors, rather than a single, direct lender. A peer-to-peer business loan is a type of financing funded by investors instead of one direct lender. P2P lenders underwrite borrowers but don’t fund the loans directly. You can check out various P2P lenders here.
- MicroFinance: Microfinance first emerged as a means for entrepreneurs in emerging economies to access business capital. The term describes small loans made to entrepreneurs, usually through a platform that allows individuals to invest as little as $25. The World Bank estimates that more than 16 million people are served by some 7,000 microfinance institutions all over the world. With a microfinance loan portfolio of just $20 million (compared to the global portfolio of $30 billion), the field is just emerging in the United States.
- Revenue-Based Financing: A growing number of firms are offering expansion capital through flexible business loans that are paid back based on a portion of monthly revenue. Revenue-based funding is suitable for existing firms--primarily those with recurring monthly revenue--rather than startups.
- Venture Finance: Some venture capital (VC) firms are upending the traditional Silicon Valley financing model by offering venture financing. Through this model, a VC offers entrepreneur-friendly loans to fund growth initiatives.
- Marketing-Focused Funding: Clearbanc is the pioneer in this innovative approach to growth funding. To fund business growth, the company provides capital to fund digital ad spends so growing companies can acquire more customers and drive revenue growth.
- Government-Funded Capital: Cities and states that are outside of Silicon Valley or other traditional startup hubs are increasingly offering startup or growth funding as a way to attract new businesses or retain firms that want to expand. Through these initiatives, a government agency--or a quasi-governmental agency--offers zero- or low-interest loans, business grants or in some cases, venture capital with a below-market equity expectation. Some states, and even countries, are also offering these types of incentives.
- Accelerator-Based Funding: Many seed accelerators offer small investments in exchange for a portion of equity, and some now offer follow-on investments for portfolio companies that raise larger seed rounds during or following the accelerator program. These innovative approaches allow founders to focus more on growth and traction, and somewhat less on raising funds.
These are just a few of the newer ways in which founders and entrepreneurs are accessing funding to launch their startups or grow their existing businesses. If you’re an entrepreneur in need of startup or growth capital, be sure to explore these emerging business funding models to find the approach that best suits your needs.
This post was written by Ron Flavin (Growth and Funding Strategist, Angel Investor, Author and Speaker at Ron Flavin, Inc., and Co-Director of the San Francisco Founder Institute), and was originally published on LinkedIn.
Ron Flavin is a growth and funding strategist who helps entrepreneurs and organizations to develop innovative growth strategies, identify new revenue sources or secure the funds they need to grow and prosper. Using his own unique methodology, he work with his clients to develop a step-by-step growth and funding action plan that builds a bridge between vision and financial goals. Using this model, he has obtained more than $200 million in funding for his clients, and been part of decision-making teams that have allocated more than $1 billion in funding. As a result, Ron knows first-hand what those who hold the purse strings look for when determining which proposals get funded and which ones get tossed aside.