Funding for Small Businesses: How to Pay For Your Disruptive Innovation
You have an amazing invention you are ready to share with the world. Your business model is fleshed out, and your products are ready to be made. Despite all your challenges, and with the combination of your education, you are ready to open your own business and create a disruptive wave in your target industry.
However, just like any other business, there’s still one big hurdle in front of you: funding. Asking for a business loan can be tricky in itself, but when your very business relies on a disruptive business model it can be even harder to convince banks to fund your idea.
Where else should you look for funding? Luckily, there are plenty of options available, but each one has it’s own risks and challenges. Let’s go over all the options available and the pros and cons of each. What do you need to do to make your dream into a reality?
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1. Angel Investing
Angel investors are groups or individuals that often invest in startup companies or entrepreneurs to help them get off the ground during their difficult early years. You might be familiar with the term thanks to the show Shark Tank, as many of the individual investors on the show use their own money to invest in the products that are showcased via an elevator pitch.
Angel investors must have a net worth of over a million dollars, and must also use their own money when investing. They often do this with the incentive of getting 20 to 25 percent of a return on their investment, with the hopes that the startup will make it big within a few years.
Popular companies like Google, Paypal, and Alibaba all got started thanks to angel investors. As knowledge sharing through online sources grows, more and more people are looking for angel investors to help their startup get a boost.
The pros: If you find the right individual to give you money, this can be an easy way to get a boost during your first couple of years; and you don’t have to worry about having a bad credit score either (since they most likely won’t check it). As long as your product is unique and interesting, and you have a solid understanding of how your business will grow and reach your desired audience, then angel investors will want to help you out.
The cons: Unfortunately, since angel investors are also individuals investing with their own money, they may be more likely to turn your idea down for investment. Additionally, if your product or company fails, you will still need to pay them back — and with interest. Angel investors are also more likely to invest if they know you personally (either through your friend network or family), so if you don’t have someone within your network that would qualify, it might be difficult to get funding for your startup.
This new source of funding is quickly becoming a popular option for entrepreneurs and startups around the world. It’s easier than ever to share your product, market your idea, and spread it around the world; all thanks to websites like Kickstarter. Even strange ideas that are specific to a location — such as Tank Sounds in Colorado; a water-tank-turned-concert-venue — can have a successful campaign online if marketed successfully.
No market it too niche or too strange for the crowdfunding world. If you build it and market it, your audience will happily fund it.
The pros: This is an easy way to not only get funding for your project, but to also get your first group of customers. Many crowdfunding campaigns will offer either early products or other goodies to their “investors,” and this in turn will work as a great marketing opportunity if your product is a hit.
The cons: There are so many crowdfunded startups on the web now, it can be almost impossible to stick out. If you market your idea properly you might be able to create a “trending” campaign online, but it is still really tricky to get noticed when the market is saturated with millions of other startups. Plus, if you share all the details of your idea, chances are there will be similar copycats that might pop up, unless you have an intellectual patent already in place. This happened to the fidget (“finger”) spinner creator, Catherine Hettinger, and the Torque Bar creator, Scott McCoskery, after their respective patents for the now popular toy expired.
3. Venture Capital
Venture capital is defined as a form of financing from a group that traditionally invests in high-risk but high-reward startups or small businesses that have a strong exit strategy in place but also have a long-term potential for growth. Essentially, venture capital companies look for businesses that plan on making a lot of money over an extended period of time.
Venture capital groups can also “invest” by providing managerial advice or technological expertise without investing money. However, these groups often have a large say in how a company is run, because their investment also comes with equity or partial ownership of the business.
The pros: Venture capital groups can offer more than just monetary help, and for many small businesses the extra managerial support and technological expertise can help you get your business on the right foot from the beginning. Additionally, they can invest large sums of money to really help give you a boost up. For entrepreneurs that have big ideas, a well fleshed out business model with room to grow, and need a lot of funding to see it through, this could be the perfect option.
The cons: If you were hoping to stay independent, this option would certainly not work for you. Also, as venture capital companies gain equity on the company, they will not always be flexible with shifting plans. Since bureaucracy is often an impediment to innovation, venture capitalists might not be helpful for a disruptive business that hopes to have a long term impact on an industry. Additionally, these financial groups often expect a quick turnaround in their investments: sometimes within the first three to five years.
4. Traditional Bank Loans
Bank loans can be tricky for startup businesses, but they often offer the best deals. Not only do they have reasonable repayment plans, but they also offer low interest rates and more freedom for disruptive businesses. If you do think about going this route, make sure you have all your research done and offer them a complete and thorough bank loan application.
The pros: Larger banks are often out of reach for small businesses or startups, but smaller community banks in your area tend to have a higher acceptance rate for loans. Don’t be afraid to do some shopping around with your local community banks or credit unions. If you can manage a “yes” from any of them, chances are you will be able to write up a great deal that works for your business and the bank. The amount of money they loan you might be modest, but it could be the right amount you need for your first couple of years.
The cons: Bank loans are tricky to acquire. Even if you have a solid business plan in place, banks will only be interested if you have a high personal and business credit score (visit our credit score resource center for more information), and only if you can prove to be a low-risk for lending. As we’ve discussed in the past when completing your bank loan application, banks want to ensure that you will have a high rate of success: often as high as 95 percent, with only a 5 percent chance that the loan will default. This doesn’t mean that bank loans are impossible, but it does mean they are extremely rare, and potentially more-so for those businesses that rely on disruption.
5. Grants or Small Business Association (SBA) Loans
The Small Business Association has a plethora of unique and generous loans available to those that are willing to apply. Government loans can be especially beneficial, and often have the lowest interest rates. Additionally, grants are also possible through the government, and grants don’t have to be paid back!
Grants require the small business to provide some sort of educational, social, or medicinal aid to society, so they won’t work for every case. However, if you’re the sort of entrepreneur who also wants to help the community and become a philanthropist, then you might be able to get a little boost from a government grant. Grants.gov is a database you can search to find any applicable grants that can work in your favor.
The pros: SBA loans are some of the best loans available to American small businesses. They have low interest rates, reasonable repayment plans, and can offer you additional support through their network of programs. The SBA community is large, supportive, and a great service for small business owners.
The cons: The process for applying to small business loans is extensive and often very difficult. They require a lot more paperwork than your traditional bank loan, and they aren’t always willing to help fund disruptive startups. It can be a waste of time to go through all that paperwork only to receive a “no,” but it is still a valuable service worth considering. Grants are also difficult to acquire, and don’t apply to every startup situation.
The Best Options for Your Disruptive Business
Every business is unique, and disruptive businesses are no exception to that rule. Funding your business will be a decision only you can decide, but not all option will be optimal for every business.
For example, if your business relies on risk, and you tend to be a more risky business person, then Angel Investing, Venture Capital, and Crowdfunding could be better options for you. All three of these options allow you the freedom you need to make risky decisions, and don’t require an impeccable credit history to be approved. Additionally, these options can generate large amounts of money in a short amount of time, allowing you to put your biggest ideas into action.
However, if you’re a less risky person, and thus run a less-risky business, your options might be more limited. Crowdfunding could still work for you, but small business loans and traditional bank loans might be better options for funding. They can have better repayment plans in place, and they will not only help your business get started but will help build your business’ credit score, as well.
Choosing what option works best for your business will be something only you can decide, but Fiscal Tiger is here to help you understand your options. Your idea — however disruptive, grand, or ridiculous it might be — is worth funding and worth selling. Once you get the right funding behind it, nothing can hold you back.
For more tips and guides, visit our small business resource center.
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Katie McBeth is a researcher and writer out of Boise, ID, with experience in marketing for small businesses and management. Her favorite subject of study is millennials, and she has been featured on Fortune Magazine and the Quiet Revolution. She researches SEO strategies during the day, and freelances at night. You can follow her writing adventures on Instagram or Twitter: @ktmcbeth