Are you looking for money to launch your new small business or finance your expansion plans? It can feel daunting at first, but MainVest wants to help you navigate through some of the potential options. We wrote this helpful guide to walk you through the process so you can get started on what matters: building your business.
Personal Capital
The easiest way to fund a new business is to use your own money. Typically, a new business begins with a sizable investment from the founders. Founders usually contribute from savings, credit card debt, or through a second mortgage.
“Some entrepreneurs might raise $100,000, or even $500,000, from those personal sources, but many entrepreneurs with good ideas, particularly those who are not in the upper and middle classes, have very little access to funds.” —Steven Bradford, Crowdfunding and the Federal Securities Laws, 2012 Columbia Bus. L. Rev. 1, at 101.
Family and Friends
It’s natural for your friends and family to get excited about your startup or small business and offer to help. Many entrepreneurs can raise capital through family and friends, especially in the early lifecycle of the business, but this option becomes less attractive as the company matures.
Loans are the most common arrangement provided by friends and family, but donations and equity investments are other options. (See: Alicia M. Robb and David T. Robinson, The Capital Structure Decisions of New Firms, 27 Rev. Fin. Stud. 153-179 (2014).) Fundraising is always a challenge, even for well-connected entrepreneurs, so you should take a thoughtful approach to ensure that your personal connections are also good investors.
MainVest provides a one-stop-shop to simplify the fundraising process. We provide personalized support to coordinate friends and family investments (and raise more funds from the crowd!) in one place, seamlessly.
Commercial Loans
Financial institutions offer a variety of loans that can get your small business up and running. Small businesses typically rely heavily on external debt sources (like bank financing) during the first year.
Financial institutions most commonly offer the following products for small businesses:
Commercial Loans
Credit Cards
Credit Lines
Personal Loans
SBA loan guarantee programs are another source of capital. The programs include 7(a) loans and CDC/504 loans. 7(a) loans provide small businesses with financing guarantees for a variety of general business purposes through participating lending institutions. CDC/504 loans are made available through certified development companies, or “CDCs,” typically structured with the SBA providing 40%, a lender covering up to 50%, and the borrower contributing 10% of the total project costs.
Unfortunately, bank lending to small businesses is less available than it has been historically. A recent report shows that business loans of up to $1 million were 17% lower than 2008 levels, and less than one third of small businesses reported having a business bank loan by 2012. (See: The Kauffman Foundation, 2013 State of Entrepreneurship Address)
To make matters worse, financial institutions and the SBA generally require a borrower to provide collateral and/or a guarantee for the loan. Securitization means that the founders’ personal assets are at risk, and dramatically raises the stakes on many promising companies.
Online Investment Campaign (Regulation Crowdfunding)
“The idea behind equity crowdfunding is both simple and revolutionary. Entrepreneurs will be able to use the Internet to pitch business ideas to millions of potential investors and allow ‘anyone with a few dollars to spend [to] become an investor.’ While this may seem like an obvious use of the Internet, until now, securities laws have prohibited new ventures from using this approach to raise capital from ‘average Joes’ and other non-accredited investors. However, the Jumpstart Our Business Startups (JOBS) Act creates a new ‘crowdfunding exemption’ that will allow companies to raise up to $1 million every twelve months by selling their stock (or other unregistered securities) to both accredited and unaccredited investors, provided that the sales are made through registered intermediaries.”
Jeff Thomas, Making Equity Crowdfunding Work for the Unaccredited Crowd, 4 Harv. Bus. L. Rev. 62 (2014).
With changes in regulation (Jobs Act, Title III), small businesses are now able to raise money directly from the people who matter most, their community! Through Regulation Crowdfunding platforms like MainVest, Small business can raise $10,000 – $1,070,000 by taking investment from local investors, who could also become potential future patrons.
Companies like MainVest allow small business entrepreneurs to campaign for funding, giving a legitimate way for friends and family to invest beyond just a hand-shake deal. It also lets them take investment from people outside of their network, pitching their idea to the greater community and giving them the opportunity to invest in their business. The entire campaign is facilitated through an online offering page, with the business providing their mission statement, value proposition, and business disclosures to ensure investors are properly educated about the opportunity.
Unlike traditional crowdfunding, the business is taking investment, not donations. With the potential to make a decent return on the table, this opens up the market for investment to a much larger market of potential supporters. The campaign is structured as a sale of securities, usually debt or equity. The securities may be tailored to suit the unique needs of each company. For example, MainVest has developed debt and equity instruments that can provide a compelling financing option for many startups and small businesses. In some cases, this can reduce the borrower’s financing costs.
If you’re looking for a new way to fund your small business, all while garnering early support and visibility from your local community, we’d love to talk. Feel free to chat with us on our site, shoot us an email, or create a free business account and start exploring a better way to fund your small business… with MainVest.