Financing Your Start-Up Business

Alternatives to the Bank and your Rich Uncle

Unless you’re already rich, you need to raise money to fund your small business.  Entrepreneurs have relied on SBA loans, credit cards, and home equity loans to get started.  It’s hard to get funds from a bank or investors because you do not have a track record.  Also, financial institutions may not want invest small amounts of money.  It takes the same amount of effort, if not more, to analyze a small loan as it does a million dollar loan.  So we will look to alternatives to these traditional funding sources.  Unlike other sites you may have come across which are paid lead generators for loan brokers, we have not been compensated in any way for links below (except Amazon).

New Telemarketing scheme Targets Business.

Be careful of any solicitation for loans you get over the telephone.  According to a Businessweek article  the people who had been pitching stocks and subprime loans a while back now have a new target — you.  The loans are often governed by a state that has lax provisions, a lot of the consumer protections that apply to consumer loans simply don’t apply.  You could end up paying over 100% in annual interest; you could get charged with a prepayment fee if you try to get out of it; and most loans have a personal liability provision.  Our advice is that if someone cold calls you, your best bet is to just hang up–people who lend money at decent terms don’t need to telemarket.

Micro-Funding Sources

Micro-Fundunding consists of loans or equity buy-ins made by people who know an industry.  It differs from Venture capital in that the amounts are usually a lot smaller.

American Express has launched a 100 million dollar fund to help innovative business startups in the Digital Commerce field–anything to do with selling stuff or processing payments on-line.  Beyond press releases, we have failed to find any information online about how to apply.

Samuel Adams has established the Samuel Adams Brewing the American Dream Fund to help you get started in your food and beverage business.  They team up with local organizations to help fund start-ups.  Their loan value ranges from $500-$12,000.   And they team up with local organizations to provide mentoring.

Investment Matching Service

The idea behind these services is that they match up investors and people who need money to invest in a business.  Think of it sort of a match making service.  They put two parties that are right for each other together.  Unlike Crowd Funding that is currently constrained and cannot invest directly in your business, you can hook up with one or a few investors who know your industry and can guide your business.  The matching service just brings you together and does not necessarily invest directly in your business.

GoBigNetwork   (10K-10M)  This is a real interesting site.  They seem to be like a dating service for investors and businesses that need funding.  They charge between $60 and $200 per month to broadcast your business opportunities on their site.  The reason you would want to pay is that investors are pre-qualified so that you are not wasting your time talking to a 14 year old kid on the internet.  They list the amount of money they can invest and the fields they are interesting in investing in.  We believe, their investors have to meet federal guidelines to be Accredited which means they have a substantial net worth and experience in investing.

To get started they offer one-on-one phone consultations with a business expert to discuss prospects of your business idea.  The implication is that if you don’t have a fundable idea, they will just tell you that upfront and save you the monthly fees.  Those seeking funds have to explain in detail by way of a budget and business plan what they need the money and how it will be used.  They site will guide about how to make a good presentation.  Again, the site works because it does not allow anyone to contact their investors before they have been vetted and have a coherent business idea.  They will guide you in setting up your business structure, internet space, logos … And you will need some capital to get started.   This lets legit investors interface with those who are ready to get going with a well thought out business plan; and they do not have to waste their time with people who just have what seems like a good idea.

They have help fund over 300,000 start ups and have 20,000 active investors.  We are just reporting what we have found from their website, and have not verified any of this information.

Gate Global This site will also do crowdfunding.  They currently operate in Brazil and India.  ????


Crowd Funding Opportunities

The deal with Crowd funding is that you will be able to sell equity stakes in you company like shares of stocks soon.  The SEC is making regulations to comply with a new JUMPSTART OUR BUSINESS STARTUP ACT (JOBS) law that has been passed by Congress.  The Securities and Exchange Commission is currently reviewing the act, seeking public comments, and crafting regulations.  Well you might be asking yourself why don’t I just go over to the copy center and print up my own stock certificates and just sell them on eBay or something like that.  Those stock certificates that you copy off would be securities.  So selling them with out SEC approval would not be a good idea.  You could get in trouble.  For small businesses the process of registering to sell securities and complying with all the accounting rules is just not practical–it costs too much.

The Rules just came out in October 2013, and they are very stringent.  For a summary, see this wsj article.    You are permitted to basically sell securities in your small business, but it might not be worth the cost to do it yourself.  You will be allowed to advertise shares in your company.  But according to the article, you will pay an attorney around $20,000-40,000 for documents, and you can only hit up rich folks–accredited investors.  The article goes on to suggest that it would be better to wait a while and use standard forms created by crowdfinding platforms.  

Before October 2013 Crowdfunding sites could specifically promise investors dividends or returns which would constitute a security, but they are able to give investors thanks and offer products.  These sites have been effective for funding art/film projects and social projects.  The term they are presently using to describe this way of raising funds is a “contribution model.”  As explained on Crowdfunder’s website the contribution model is non-investment funding. This model fits companies who have products or services that supporters and contributors are willing to pre-purchase, contribute to, or support for personal reasons.  And this might still be the best model if you are planning on getting money from a large group of not so wealthy people.  This option will not go away because of the JOBS act.

But now the websites will be sites that you can use to raise money for your business ventures.  They are known as Crowdfunding Portals.  (And even though some duties  have given them five star reviews, they haven’t started cash for equity Crowdfunding yet.  Kind-of like seeing the foundation of a new restaurant being built and saying that’s the best place I have ever eaten at.)


So what exactly is a CrowdFunding Portal?

A CrowdFunding portal will let investors know about business opportunities and do some basic vetting of the opportunities.  They get a fee or cut of your investment.  But ist’s important to understand that they will not act like business brokers or stock brokers.  According to the SEC (link)  Among other things, the JOBS Act imposes several restrictions on the activities of a registered funding portal. A funding portal is not permitted to:

  • provide investment advice or make recommendations;  
  • solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;  
  • compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;  
  • hold, manage, possess, or otherwise handle investor funds or securities; or  
  • engage in any other activities the SEC determines to prohibit in its crowdfunding rulemaking.

In addition, each funding portal and each crowdfunding broker is prohibited from:

  • compensating promoters, finders, or lead generators for providing the intermediary with the personal identifying information of any potential investor; or  
  • allowing its directors, officers, or partners (or any person occupying a similar status or performing a similar function) to have a financial interest in any issuer using the services of the intermediary.

So if you are called or e-mailed by someone who says they can get money for your business that’s probably a scam.  The reason that the SEC is taking so long to make the rules is that everyone agrees allowing people to solicit money from unsophisticated investors for investments in business opportunities or telling entrepreneurs that for a fee their dreams can come true could result in a great deal of fraud.  That’s why it has been illegal to do this for so long.

As with any new field of business is hard to determine which companies will be the big successes, in other words who will be the Microsoft and Apple computers of the future and will be the companies like Osborne Computer.  With no track record you meeting you really have to go on is how nicer websites look.  We went ahead and made a list of companies that will probably be going into the money for equity crowdfunding space in the near future, that is as soon as the SEC finishes his work on the regulations.

  • Cielex  They have a nice website, but not too many ventures have signed up to be funded.
  • Crowdfunder  This site is aimed at providing funds for businesses.
  • CrowdRaise  (For Charitable Causes)
  • CrowdTilt (They say it’s for anything, but were not sure if they had investing in mind.  It’s aimed at groups funding projects and overcoming the free rider problem whereby some people will enjoy the benefits without contributing.  Think of Public Radio’s problem.)
  • Equity Net  They claim to be the original crowdfunding platform.
  • Go Get Funding This is for causes not necessarily businesses.
  • Go Fund Me
  • Kickstarter This is the best know site.
  • indie go go
  • Razoo This is for Non-profit fundraising.
  • WeFunder


Social Lending Sites

The concept behind social lending sites is that they broadcast your need to borrow money to many lenders.  And instead of making one big loan through particular business lenders make many will make many loans many businesses thus spraying out their risk.  That’s why a pool of lenders is might be willing to lend you money.  But you have to present a good business plan, and have a good credit profile.  The sites below screen  their borrowers so they can have a high payback ratio for their lenders.

Affirm  This is a newer startup that does consumer debt refinance, lending to business, and transactions.

Lending Club  They are looking for a high credit score of 700+, and annual income as opposed to a projected income, and a credit history.  They accept about 10% of applicants onto the site.

This SoCal Connected story (link above) explains that Kiva has started making loans in the US. This website has been a portal for investors in the first world to help people in the third world get out of poverty for years. But don’t call it charity. They have a high payback ratio. They have started in Southern California. Their loans go from a couple hundred dollars up to $10,000.  Apparently lenders do not get interest on their loans, field agents do collect interest to support loan administration.

Merchant Advance “Loans”

One source that you might want to look into is .  The will fund your business if you sell through major e-retailer platform e.g. ebay, Esty or Amazon, or through a pay-pal account.   They make Merchant Advances not Loans.  The key is that the e-retal platforms take money from your costumers and then return it to you.  You sign an agreement that allows Kabbage to debit your account at the e-retal platform.  It seems like they are willing to do this because the funds lent from you are paid back out of your accounts at your on-line retailers.  If you are making sales, they will get paid.  So if you owe them money the e-retail platform cuts them a check from your sales before you can get your hands on it.  So obviously you have the have an established business and you have to have good credit.  They can loan from $500-$50,000.

© 2012