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Seven
Alternative Sources of Capital for Setting Up a Business
Author:
Amy Grace Remollata
Borrowing from banks is every small entrepreneur’s nightmare. One
gets turned down for bank loans for a variety of reasons, including lack
of assets, collateral and business experience. Don’t despair, however.
There are several common types of alternative sources of capital for
setting up a business available to young companies.
Savings and Investments
The first source you should consider is your own savings and
investments. One disadvantage though of self-financing is that if things
did not turn out the way you want them to be it will be your money that
goes down with the ship.
Angel Investors
Angel investors are affluent individuals who provide capital for a
business start-up, usually in exchange for ownership equity. These
individuals are looking for a higher rate of return than would be given
by more traditional investments (typically 25% or more).
Angel investors are an excellent source of early stage financing and
high-growth start-ups. They are often willing to tread where there is
too much risk for banks and not enough profit potential for venture
capitalists. And since angel investors are often retired business owners
and executives, they can also provide valuable management advice and
important contacts.
Peer to Peer Lending
Peer-to-peer lending is a means by which borrowers and lenders may
transact business without the traditional intermediaries, such as banks.
It can also be known as social Lending, ordinary people lending money.
The process may include other intermediaries who package and resell the
loans--examples are Prosper.com and Zopa-but the loans are ultimately
sold to individuals or pools of individuals. Prosper.com, which is
available in the US only, offers business loans for small companies.
An enabling technology for peer-to-peer lending has been the internet,
which connects borrowers with lenders, for example through an
auction-like process in which the lender willing to provide the lowest
interest rate "wins" the borrower's loan.
Money pool
Instead of a bank loan, borrow smaller sums from several family members,
friends, or colleagues. The lenders have no legal ownership in the
business, but can act as advisors and cheerleaders for your venture.
Remember though that nothing causes tension in a family like lending
money that is never paid back.
Credit Cards
Many business owners use their credit cards to fund their businesses.
Credit cards offer the ability to make purchases or obtain cash advances
and pay them at a later time. But as a long-term financing method, they
can be expensive. Most credit cards will charge you 2% to 4% of the face
value of a cash advance as a "fee" making this method of financing very
risky.
Bootstrapping
Another source of capital for setting up a business is bootstrapping. It
is a way to finance a business by saving rather than borrowing money.
It's being as frugal as possible so your business can be started on as
little cash as possible.
The use of private credit cards is the most known form of bootstrapping,
but a wide variety of methods are available for entrepreneurs. Other
forms of bootstrapping include owner financing, minimization of accounts
receivable, joint utilization, delaying payment, minimizing inventory
and subsidy finance.
While bootstrapping involves a risk for the founders, the absence of any
other stakeholder gives the founders more freedom to develop the
company. Many successful companies including Dell Computers were founded
this way.
Venture Capital
Venture capital is not suitable for all entrepreneurs. It is an option
for small companies that have a seasoned management team and very
aggressive growth plans; however, venture capitalists will rarely invest
in small businesses that have no intention of going public. If a company
does have the qualities venture capitalists seek such as a solid
business plan, a good management team, investment and passion from the
founders, a good potential to exit the investment before the end of
their funding cycle, and target minimum returns in excess of 40% per
year, it will find it easier to raise venture capital.
The venture capitalist objective is to invest in a company for a short
period of time – say 5 years – and then cash out of the business while
making a significant return on their investment.
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OUR
Investors
Angel Capital
