One of the biggest challenges that small business owners have faced throughout history is simply generating enough capital to start or expand their business. While financing still remains a top concern for those who own small businesses, new trends are constantly emerging which aim to streamline the process. While these innovative methods often take center stage, classic financing tactics still have their place amongst the top 5 trends in small business financing to date.
Crowdfunding is rapidly becoming a popular way for small business owners to finance their businesses. Many of these owners utilize platforms, such as Kickstarter and GoFundMe, where they are given the opportunity to explain their vision and discuss their needs. These pages are then featured on the crowdfunding platform and can be shared through social media, e-mail or websites. The process is rather simple and eliminates the hassle of making endless pitches to prospective investors. The simplicity of these platforms does come with a steep transaction cost; sometimes as much as 5-10 percent of the total amount of funds raised. Many small business owners have had great success with crowdfunding, although the key to successful crowdfunding is marketing. A business owner that has an immense social media following, for instance, will generally fare better than one with a limited online presence.
2. Alternative Lending
Alternative lending is a booming industry where the business is often conducted online. In this scenario, a business owner will fill out an application for a loan online. The alternative lender, much like a bank, will review the application and determine whether or not the owner meets their loan qualifications. If approved, funds can be received as soon as the next business day. Alternative lenders often serve those who do not qualify for traditional bank loans and typically lend less although the interest rates may be high.
Bootstrapping has always been a popular, yet risky way to finance a small business. With this method, owners use their own money to finance their business ventures. They may use money that they have taken from a savings or retirement account or they may sell assets to raise the required funds. In either case, this financing option is appealing to many as they will not owe investors, banks or other lenders. While they retain complete control over their business, the drawback is that personal finances often become intertwined with business finances. In the event that the business fails, the owner ends up suffering a severe blow to their wallet.
4. Traditional Bank and Small Business Administration Loans
Traditional bank and Small Business Administration (SBA) loans are still one of the most common ways to finance a small business. Owners may opt to secure a business loan through a local or National bank or through the SBA’s lending program. Many small business owners report that this traditional lending option provides them with a sense of security and stability over other financing methods. Others, however, may not qualify for these loans or decide that they are not comfortable with the terms and conditions set forth by the lender.
Many envision elementary school bake sales when they hear the term “fundraising”. While the concept is popular in schools, it is also frequently utilized in business funding. The practice is similar to crowdfunding, although this approach is more traditional and hands-on. A fundraiser will generally entail hosting a live event where there are festivities and people who are passionate about the business’ mission. This can be an excellent way to raise funds while also garnering support from the community.