Less than 50% of small businesses survive for more than 5 years, with a large portion of these failed ventures lasting less than 12 months. Because of this high risk, bank loans are hard to get and many alternative lenders don’t want the liability that comes with investing in a startup. Without enough collateral, companies have few financing options to get off the ground. Currently, the most common forms of small business financing for budding entrepreneurs include: angel investing, venture capital, crowdfunding, and invoice factoring. All of these forms of financing have their pros and cons. Which one is right for you? Let’s discuss…
Angel investing is a one-time investment to help businesses push through their growing pains. An angel investor is simply someone, most of the time the owner’s friend or a family member, who puts their own money toward financing the business. Terms of the loan are flexible, with no real industry standard to follow. However, unless the business owner knows a wealthy investor, this tends to be a very low capital solution. Additionally, depending on the investor, business owners may be asked to relinquish a significant portion of ownership to the financer. An angle investor is a good option for startups that are too new to show anything except an idea for a product or service.
Venture capital provides higher capital funding for businesses with high growth potential. Investments come from a collection of pooled money from private parties, corporations, and foundations; this pooled capital is invested into a startup, and in return the venture capital firm gets a big stake in the business’ decision making and operations. Opposite to angel investment, these investors are driven by personal economic interests — because of a big personal stake in the business and the time involved with mentoring, venture capitalists work to maximize profits at all costs. Because this method of funding offers much higher capital, as well as a major time commitment from the investors, getting venture capital requires promise and high growth potential. This form of business financing is great for entrepreneurs who have a compelling idea and are trying to push/expand into a competitive or emerging industry, as venture capitalists have ready access to many useful resources.
Startups can also go the crowdfunding route. Crowdfunding is where the business owner uses a public funding platform, Kickstarter or Go Fund Me for example, to incentivize small one-time donations; typically, some sort of reward is offered to incentivize donations. Crowdfunding is a low cost option to receive fast capital, though the amount is usually much lower than other forms of business financing, with a portion of the total amount accrued being lost to campaign incentives and the service fee charged by the crowdfunding website. Crowdfunding isn’t a bad option for most startups selling consumer products, as it gives the business owner a place to display/market their goods without much overhead.
Businesses with a couple months of operation and frequent sales and billing, qualify for invoice factoring. Invoice factoring is when a business sells unpaid invoices for immediate working capital. Financing invoices is useful for solving problems associated with customers taking a long time to pay, as well as providing insurance on invoice payment—credit checks on future clients. Invoice factoring is a great option for businesses having difficulties trying to obtain business credit. Since factoring uses invoices as collateral, more emphasis is placed on your debtor’s credit, which makes this form of funding attractive to brand new companies without a high credit rating. Factoring invoices is also a good option for startups because it also gives the business a steady stream of income to help keep up on expenses while growing.
If you are interested in any of the funding routes above, or have questions about which would best suit your business, give us a call at 1+(888)222-2840. Transfac Capital is an invoice factoring company with over 75 years of industry experience, low rates, and no hidden fees. Hundreds of startups have benefited from our industry expertise, and so can you.