You´ve got the great idea, a sound business plan on paper, a few employees ready to leave their jobs to follow you, and an excess of motivation and enthusiasm. Unfortunately, you don´t have the capital to get your entrepreneurial vision off the ground, and without money, your vision isn’t going anywhere.
Raising money for a new business used to be a simple and straightforward. You would schedule an appointment with your local bank, explain your business plan and finances, and hopefully get a loan to get started. Today, however, banks only fund 23 percent of the small business funding requests that they receive.
With such low approval numbers, you would think that small businesses would be on the way out, making way for the global conglomerates that increasingly dominate our global economy. However, 97 percent of all businesses in Australia are considered to be small and medium sized. Despite a relatively high failure rate, small business owners in Australia continue to function and open regularly.
The rise of ecommerce websites, online freelance platforms, and other innovations in the world of how businesses are organized in a world dependent on the internet have combined to reduce some of the startup costs of running a business. While you might not necessarily need to purchase or rent an expensive business locale in a prime real estate area, there are other startup costs that can be prohibitive.
The smart entrepreneur and small business owner today is one who explores alternative financing options to help get a business of the ground. Below, we look at five non-traditional methods and tips for how to secure funding for your future business.
Perhaps the word “target” might sound a bit aggressive, but when it comes to raising money for your business, making the right connections is by far one of the most important parts of the planning process. Even for companies with a proven track record of financial success and stability, only between 1 and 2 percent of potential investors will actually invest any sort of capital into a given business. The main reason for this relatively low conversion rate of receiving investment capital is due to the personal nature of investing.
Obviously, you need to target potential investors who have sufficient financial liquidity to make an investment decision. That means that it is probably a waste of your time to target people (even family members) who are short on cash or who are currently involved in financial struggles of their own.
Furthermore, unless you have a business proposal that absolutely clicks with a potential investor´s interests and attention, you will most likely want to exploit relationships wherein the investor personally knows the leadership behind the business plan. The closer they are to the leadership team, the better the chance that they will know and understand your business plan and get excited enough about the possibilities to invest their own money.
When searching for business loans outside of the traditional banking system, then, it is important to sit down with your team and make a list of potential investors that fit the following criteria:
- Has sufficient financial liquidity to make an immediate investment (promises of help down the road aren’t usually helpful to people trying to get a business idea off the ground).
- Knows you and your leadership team on a personal level, or is willing to sit down and spend time to get to you on a level that takes your business proposal beyond the phase of a bunch of documents on paper.
- Has an investment portfolio that fits with your overall business plan or strategy.
- Has a personal interest in the area of business that characterizes your entrepreneurial vision.
- Has a proven history of investing in small businesses, especially during the past 12 months. It is important to do your own research on potential investors, just as they will also do their research on you.
Don’t Underestimate Small Banks
We mentioned above that less than one out of every four business loans are approved by the general banking system. However, the vast majority of those “rejects” are from the large banking corporations that operate purely on the basis of statistics on inadequate cash flow, limited collateral, poor credit scores, or simply because your business is an early stage startup that represents to much of a risk.
While the procedures and regulations standardizing the operation protocols of larger banks are usually rigorous and inflexible, smaller banks tend to have more leniency in how they manage loan requests. Local banks, especially, might be able to identify with your business proposal on a more personal level, and thus understand your vision beyond the hard numbers and statistics.
Whereas larger banks will focus on your current debt and cash flow limitations, smaller banks might be willing to listen to your explanations about why you believe that your business plan is sound and how you plan to make it succeed.
If you are not on good standing with your local bank, today there are also several online bank lenders that finance small business ideas. You can check out this guide to getting a small business loan to discover the wealth of financing options that are open to you and your business.
Contact Private Investment Firms
Let´s imagine that the banks (both big and small) have closed doors on your business proposal and you don’t have a wealthy uncle willing to throw money at his favorite nephew´s business plan. Private investment firms are another way to gather investment capital for a business idea. While you will certainly need to have a solid business plan that demonstrates your knowledge of market trends, potential risks, and solid cash flows, private investment firms and networks will usually be more willing to invest in what banks might consider to be too high of a risk.
For private investors, small businesses can represent a high-risk, high-reward investment opportunity. The opportunity to invest in the next PayPal or other startup that literally exploded onto the global economy is certainly an enticement that many investors don’t want to pass up on.
Furthermore, even if you don’t get funding from the private investor you originally sought out, you might be able to garner valuable contacts and business advice. These investors tend to understand the nature of business, and might be able to either give you valuable advice to improve your business proposal or to put you in contact with other investors who they think might be interested in your idea.
In recent years, thousands of artists, entrepreneurs, musicians, and more have successfully raised millions of dollars through crowd funding platforms. In Australia, two of the most popular crowd funding websites include Pozible and OzCrowd.
According to Australian Securities and Investment Commission, crowd funding allows people who are not professional financiers to pool together their money to support a specific project. One of the unique aspects of crowd funding for a small business proposal is that these platforms are specifically oriented towards businesses with relatively small startup budgets.
While you most likely will not be able to raise a million dollars on Pozible, you might very well be able to secure the minimum financing to get your project up and running. This can be important if you are searching for ways to get your business started to show initial financial success and positive cash flow statistics that will subsequently allow you to apply for more significant funding down the road.
Lastly, if cold calling potential investors to ask for funding is not your thing, crowd funding proposals work well when publicized through social media platforms and even through word of mouth.
Pledge Future Earnings
For many small business owners, the idea of pledging a part of your future lifetime earnings to an investor or group of investors can seem like a difficult idea to swallow. While for some people this might seem like a new form of indentured servitude, for others it represents an exciting opportunity in venture capital.
Essentially, you agree to give a percentage of the future lifetime earnings of your business in exchange for an agreed upon sum of capital up front. One of the benefits of this type of innovative funding is that it most likely frees up your immediate cash flow. Instead of focusing on trying to pay employees while not defaulting on your bank loan, this type of financing can allow you to focus your energy on growing and expanding your business during those crucial first years.
Obviously, when pledging your future earnings to a group of investors, it is important to plan ahead in the event of the failure of your business. If you feel okay about sacrificing some of your long-term earnings for immediate startup capital, this might be the option for you.
The big banks are no longer the only option when it comes to securing financing for your business proposal. Knowing who to target, checking on smaller banks, private investment firms, crowd funding platforms, and even pledging future earnings are all innovative strategies that can help small business owners get the capital they need to become their own boss.