by Marc Prosser
Venture capital is not the right path for every business. As early stage venture capitalists are often looking to make 20 to 100 times their initial investment, many businesses which are designed for more modest growth (restaurants for example) are not good candidates for VC investment. Instead, many companies should consider raising debt. There have been a number of new financing options that have appeared in the last few years for new and small businesses.
If you’re a brand new business, your best option is usually raising money from family and friends. Family and friends provide new companies with $23,000 of financing on average. Startup TrustLeaf makes it easy to let friends and family know about the opportunity, provides legal documents to formalize the process of borrowing, and even sends reminders when debt payments are do.
For startups looking to raise money from outside their inner circle, there are Peer-to-Peer (P2P) loans, which enable “strangers” looking for a good return, to invest. Lending Club and Prosper facilitate personal loans for business purposes for up to $35,000. The catch is that these loans need to be paid regardless of what happens to the business, and can impact the business owner’s personal credit score.
If you’re a business with two years of operating history, there are lots of options, ranging from invoice factoring, to medium term loans. Factoring has a history that goes back hundreds of years. However, the way new factoring companies Fundbox do it, is completely new. They use information from a company’s accounting software to score invoices for the likelihood of payment. The common theme among these new lenders is the widespread use of technology. These firms often have a completely online application process, make decisions about lending using sophisticated algorithms, and even automate the collection of funds from a company’s bank account. This use of technology has radically reduced the costs of providing financing to small businesses.
Below is an infographic about the new leaders in the startup and small business lending space.
Marc Prosser is co-founder and publisher of Fit Small Business which provides “how to” guidance to small business owners. Previously, Marc served as the Chief Marketing Officer of a well known financial services firm.
David Goehring | Courtesy of Marc Prosser