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8 Venture Capital Alternatives for Small Tech Businesses

8 Venture Capital Alternatives for Small Tech Businesses

Friday, June 10, 2016/Categories: business-tips

The vast majority of entrepreneurs don’t deal with venture capitalists and angel investors. Unless you’ve got a highly disruptive, rapid-growth, million-dollar idea, you probably won’t either. There’s more than one way to get the startup capital you need. As some businesses know, investors can end up being more trouble than they’re worth.

Here are eight ways you can raise startup funds without relying on VCs or angels.

1. Grants

Your business may qualify for local grants or state economic development incentives that can provide you with capital, or at the very least, tax breaks. Check in with your state department of commerce or your city to see what kinds of programs are available.

If you’re in high-tech research and development, also take a look at the Small Business Innovation Research (SBIR), powered by the Small Business Administration (SBA) and the federal government to provide grants for small businesses.

2. Strategic Partnering

Depending on your situation, you may be able to get a financial – and strategic – boost by partnering with an existing company or an interested individual. Though you might lose some control over the business this way, it can be a great strategy if you and your partner have a strong relationship and a shared vision.

In addition to increased capital, partnering with a larger company can help you find strategic solutions to things like manufacturing and distribution.

3. Borrowing from Friends and Family

It’s generally good advice to keep business separate from your personal life. However, some entrepreneurs may get their first startup capital from generous friends and family looking to support them.

If borrowing from friends and family, try to:

  • Keep loans small-scale.
  • Remember to have a written agreement spelling out how much was loaned and what the terms of repayment are.

It doesn’t have to be anything formal, but having a written record can help prevent a relationship-ending dispute.

4. Loans from Banks or Credit Unions

Small businesses can use traditional bank loans as capital to get started, but it can be hard for first-time entrepreneurs to qualify. You may be able to receive aid securing a loan through the SBA’s Loan Program.

Another option is joining a credit union. Credit unions usually offer cheaper loans and lower fees, but you have to qualify to join one, and they may not provide as many business services as a larger bank.

5. Alternative Lending

“Alternative lending means looking at alternative sources of debt capital that are not banks,” says George Popescu (@GeorgePopescuUS), a partner at (@LunacapVentures).

Popescu explains a new industry appeared about five years ago, led by On Deck Capital and companies like Fundera and Lendio.

“Those now make capital available to companies that are in much earlier stage than banks ever did,” he says. “Now you can borrow hundreds of thousands even if you have been in business for as little as six months.”

6. Depositor Solutions

In certain types of finance-related businesses, clients deposit their securities or cash with you. This might happen if you’re a brokerage, for example, and you’re in charge of handling transactions for a client.

“In those cases, depending on regulatory framework and rules, you can rehypothecate the money deposited with you by clients in order to deposit it with banks or clearing houses,” Popescu says.

In other words, you may be able to use your clients’ money – money they’ve given you to pay for something else – as your own capital. Here’s a simple version of how it works:

  1. The client gives you money to buy something for them.
  2. You use that money to pay for your own business’s needs.
  3. You use other funds to buy what the client wants (using another client’s deposit, for example).

You still have to pay back the client if they withdraw their funds, which is why this method involves a lot of regulation and rules.

This method isn’t always possible, says Popescu, but when it is it can provide you with very cheap capital.

7. Factoring

Factoring is a method in which you sell your accounts receivable, or invoices, to a third-party financial company. This company, also called the “factor,” advances you money and takes on the risk of collecting your customers’ payments. What’s the catch?

  • The benefit: you get cash quickly on hand without assuming any debt.
  • The tradeoff: you pay a fee to the third party.

For a more detailed breakdown of how it works, take a look at this guide from RTS Financial.

8. Crowdfunding

Crowdfunding is now a viable option for startups, thanks to recent regulations that have finally caught up with technology, says Dave Sorin (@sorin_dave), attorney and head of the Venture Capital & Emerging Growth Companies practice at (@mccarterenglish).

Now, businesses can offer an equity investment in their firm to a limited number of investors without doing a full IPO. There is a substantial amount of regulation around the process, however. Online investment site Venture Beat lays out what you need to know about the process.

What caused the delay in making crowdfunding available to startups? Sorin says the U.S. Securities and Exchange Commission (SEC) wanted to make sure investors didn’t “overeat” and invest in too many early-stage companies.

Still think that venture capital is the way to go for your business? Prepare for the process and check out “VC Funding Success Stories: A Conversation with Krista Morgan and David Bitton.”

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