DISCLAIMER: First Venture Legal does not intend to endorse any of the companies or organizations mentioned in this article, but offers them for example purposes only.
2012 may be a difficult years for entrepreneurs to raise capital from the traditional sources of commercial bank loans and venture capitalists. While some in the startup financing industry are optimistic, some surveys shows that both banks and VCs intend to give out less money in the coming year. However, this shouldn’t discourage entrepreneurs with a good idea from getting started in 2012. The following is a short list of new and innovative funding sources for entrepreneurs who are looking for seed capital.
Local banks and credit unions
Although standards for business loans are still very tight, normally requiring significant assets for collateral or a longer track record of solid cash flow and growth, entrepreneurs who require larger sums of seed funding can try local banks and credit unions for traditional loans. Because community banks and credit unions are not exposed to troublesome toxic assets or sovereign debt, they are less jittery about granting loans to small businesses. Entrepreneurs looking for a bank loan to start a business can still expect to likely have to make personal guarantees on the loan, but with community banks and credit unions they may find a more willing lender.
In addition, start-ups may look into negotiating a revenue-based payment plan on their loan. This can be particularly helpful for start-ups whose revenues vary seasonally or are sensitive to economic conditions.
Although you are likely to get more favorable terms from a local bank or credit union, you should always still take the time to have the agreement reviewed by an attorney and consider whether the loan is one your business can afford and the terms are ones your business can handle.
Private and public grants
Entrepreneurs can also apply for public and private grants. Despite budgeting difficulties in many states and localities, governments are looking to stimulate their economies by encouraging the growth of small businesses. There are also organizations on the private side that also provide grants to start-up businesses. Some grant organizations are focused a specific category of venture, while others are general in nature.
Similarly, numerous public and private groups and business schools hold venture competitions. Most competitions are organized by theme or business sector, or by the stage the business is at (whether it be the planning stage, seed funding stage, or Series A funding stage, etc.). Entrepreneurs are usually asked to make presentations to judge panels composed of experienced entrepreneurs, attorneys, or venture capitalists; the presentations range from detailed explanations of the business plan and record to a simple 30-second “elevator pitch”. The competition prizes include cash amounts ranging from several hundred to tens of thousands of dollars, or free business equipment or professional services, or, like organizations such as MassChallenge, provide assistance more similar to that provided by incubators and accelerators.
Peer-to-peer lending and crowdfunding
The newest trend in funding of small businesses is peer-to-peer lending/crowdfunding websites. Peer-to-peer lending and crowdfunding involve groups of individuals connecting with entrepreneurs to lend or donate small sums of money. Examples of peer-to-peer lending sites include Prosper and Lending Club. Some sites are targeted towards social or artistic ventures, such as the crowdfunding sites 33needs, FansNextdoor, and IndieGoGo. Some sites require the entrepreneur to set a funding goal and only release the money to the start-up if the goal is met, while others allow the start-up to keep whatever money is raised; virtually all of the sites charge a transaction fee.
I’ll be going into more detail about peer-to-peer lending and crowdfunding, particularly the legal aspects, in a future article. However, entrepreneurs who look to get involved with peer-to-peer lending and crowdfunding organizations that exchange equity or debt for the financing should be extremely cognizant of legal issues, particularly securities issues when equity is exchanges.
Equipment leasing and vendor financing
If your business requires significant and expensive equipment it may be worthwhile to look into the possibility of leasing equipment or having the seller finance the purchase, or if you purchase significant amounts of supplies and goods on a regular basis your business may consider establishing an open line of credit with supplies. It goes without saying, of course, that you should not lease or finance equipment and goods your business cannot afford, and that the agreement contains terms agreeable to your business. If you intend to get into a leasing or financing agreement, you should have an attorney at least review any proposed agreements to help you understand your rights and obligations; or, if desirable, have an attorney in the process to negotiate more favorable terms for your business — it’s likely that other party has an attorney working on their side of the deal.
As always, feel free to leave your comments in the comments box below, or go to our Contact page to send us your questions or suggestions for future articles. Thanks for reading!