Looking Beyond Banks for Financing

CEO Tech Guide to Creative Financing Looking Beyond Banks for Financing By Verne Kopytoff February 05, 2013 Entrepreneurs starting businesses drains their savings, mortgage their homes, and hit up friends for cash. After landing some customers, they bring on investors to fund an expansion. It’s a path taken by countless startups. For many, it’s a road to frustration. Access to financing is among the toughest challenges entrepreneurs face. Not everyone has deep pockets or connections with investors. Banks—the most obvious source of money—were already reluctant to make loans to untested, unprofitable businesses with limited collateral and then pulled back on lending during the recent recession. Small business loans fell by half during the depths of the crisis, according to the Thomson Reuters/PayNet Small Business Lending index. Lending has since recovered somewhat, but it is still down nearly 25 percent from its peak at the end of 2006. However, nascent companies—and even some mature ones—have a growing number of alternatives they can tap for capital. Crowdfunding, peer-to-peer lending, microlending, and further options have gained traction in the past several years. “It’s really encouraging,” says Todd McCracken, chief executive of the National Small Business Association, an industry trade group. “We’re starting to see a real renaissance in small business financing.” Few methods of obtaining startup capital have received more attention lately than crowdfunding, by which companies ask the public to make donations, investments, or loans. The best-known contribution-based crowdfunding sites are Kickstarter and Indiegogo. Jimmy Buchheim, founder of StickNFind Technologies, in Davie, Fla., listed his first campaign on Indiegogo recently as a last resort. He had pitched two large companies on developing his idea—Bluetooth enabled stickers that help people track their lost keys, shoes, or cat using a smartphone—but got nowhere. So he decided to forge ahead and build the product himself. Lacking connections with investors and averse to pitching to banks, he took his idea directly to the public. Buchheim’s idea was a hit, raising more than $900,000 from more than 16,000 people. The show of support encouraged him to increase his planned production to 200,000 units, far more than he would have done without the pre-orders he received as part of his Indiegogo campaign. He’s using the money he raised to hire engineers and cover the cost of manufacturing. “As an inventor, it’s been truly amazing,” Buchheim says. Not every business is a good fit for Indiegogo or its rivals, Buchheim says. Companies without experience delivering a project on time risk damaging their reputations, while those who want to keep their plans under wraps may have their ideas stolen, he cautions. Slava Rubin, chief executive of San Francisco-based Indiegogo, says that his website is a useful tool for any company looking to gauge consumer interest in a product and to collect customer e-mails. Making the most of it, however, requires some forethought, he says. Listings for tangible products, particularly those that are further along in development, usually attract more contributions. Campaigns with a video do better than those without one, he adds. Another version of crowdfunding involves companies soliciting the public for investment rather than for contributions. The Jobs Act, signed into law last year by President Obama, paved the way by loosening restrictions on who can invest in private companies. Federal regulators have yet to finalize the rules, so websites that were planning to serve as crowdfunding investment hubs are on hold. Some are getting around the logjam by trying to serve wealthy clients, known as accredited investors, who have always been able to invest in start-ups. “It is certainly a pain for us because we built something that we think is pretty incredible,” says Ryan Feit, chief executive of SeedInvest, a crowdfunding site that is stalled by the regulatory delay. “Regardless, it’s not the worst thing in the world to work with accredited investors.” Another method, peer-to-peer lending, leaves financial institutions out of the picture. Borrowers list the size of their desired loan and its purpose online. Lenders—a mix of regular people and investment firms—decide the amount they want to fund, based on the interest rate offered and their calculation of the risk. In one example, a bait-and-tackle-shop owner in Michigan listed a three-year, $6,500 loan on Prosper, a San Francisco-based peer-to-peer lender whose rivals include LendingClub and SoMoLend, to buy inventory for the spring fishing season. The appeal, which offered lenders a 15.79 percent yield, received a warm reception on the site. After three days, lenders had already funded 70 percent of the loan. CONTINUE READING HERE