Accepting cash in the form of VC funding is not the right choice for all entrepreneurs or business models. Although money is always tight, some startup founders decide that they want to go about fundraising a different way—one that doesn’t involve giving away big pieces of the equity pie.
Eleven entrepreneurs from the Young Entrepreneur Council (YEC) offer some tips for raising money without relying on venture capital:
1. Merchant Cash Advances
Although I rarely recommend them to my merchant account clients, in some instances, obtaining a merchant cash advance on your credit card processing income can be a great way to get a cash infusion. If you’re not in a position to get bank financing and aren’t looking for a traditional investment, these advances can be a good option.
You’ll need to have at least one year of history with a credit card processor to apply. The good news is there are options that exist that won’t sit on your personal credit. And in some cases, you can negotiate the terms of payback time and interest with the provider.
2. Convertible Notes
If you don’t want to take VC money just yet or you’re unclear of the path you’ll take, convertible notes are a great way to raise money. Basically, you open conditions like, “We want to raise $500,000,” and you give investors conditions on the minimum investment and the prices for your stock.
Then investors have the option of keeping this money as a loan and returning it or converting it into shares when a larger round of funding takes place. It’s great because it allows you to have a flexible valuation until the company has proven traction.
At Switch, we went the route of raising money from friends and family and staying lean and becoming extremely good at managing cash flow. I continue to own 100 percent of the company. It has been stressful to not have some backup cash in the bank, but owning and controlling the destiny of the company is an awesome end result.
4. Crowdfunding Projects
VC money is tough to acquire, so most small businesses need to look for alternative forms of financing. A popular way to raise initial capital, as well as develop a proof of concept is through crowdfunding.
If you’re developing a product, you can fund your business through pre-orders; otherwise you can offer other rewards in exchange for donations. Thanks to the JOBS Act, you can now crowdfund for equity, which has begun to become popular through platforms such as Fundable.
5. Charge Cards
Before starting a company, I thought “charge card” was just another term for “credit card.” In fact, they are different things entirely.
A charge card allows cardholders to spend much larger amounts of money, but the credit limit must be paid back more quickly (usually in less than 90 days). If you’re looking for working capital to help run your business in the short term (for example, while you’re waiting to be paid by clients), charge cards can be the perfect solution.
ZinePak has a few charge cards. Our favorite is the Plum Card by American Express, which rewards cardholders with 1.5 percent cash back for charges that are paid off in full within 10 days of the statement date.
6. Internal Money
One red flag for investors of startups is when founders don’t seem committed to the project. Employees can walk away from a business at the drop of a hat. If an investor puts money into a venture that loses its founders in the early development of the company, the company usually fails.
If you put your own money into a project, I guarantee your company will have a higher chance of success than if you took only outside investor dollars. Extending this even further and encouraging your employees to invest in the company can further commit each employee to the success of the company while getting you the funding you need.
7. Business Equipment Loans
Financing of tangible assets is a lot less risky for lenders than a cash advance on future sales or a personal loan. Many reputable equipment finance firms will offer 100 percent financing on everything a startup needs, from servers to computers to filing furniture and fixtures.
Leveraging good personal credit as a guarantor can help build credit for a business equipment loan that will be paid back through the guarantor’s personal finances if the business fails to pay it. This frees up valuable capital that can be used for payroll and other marketing expenses.
I am not a fan of cash advances because the interest rates will crush a young company, and they are usually impossible to pay back early, even if you attempted to refinance them.
8. Sales Profits
Zig Ziglar said it best: “Timid salesmen have skinny kids.” His quote expresses the truth about selling and growing a business. If you’re scared to sell, then you’re going to have a very tough time making it in business.
The best way to fund your business is to get sales. Get on the phone, call your customers and make them an offer. We found out that our customers wanted someone to set up campaigns for them and would pay for it. Knowing this, we then started a service side of the business and generated $20,000 the first month. Sales cures all.
9. Business Loans
Institutions are lending, rates are still relatively low, and securing a good business loan is a real option.
If possible, opt for a line of credit. A line gives you complete flexibility to spend and repay the loan at your discretion while only paying interest on the amount used. If you are a product company, factoring receivables is also a very strong option. If cash flow is tight and you need to finance the next round of product or cover payroll, factoring can provide a relatively fast and low-cost alternative to a conventional loan.
10. Revenue from New Services
I have worked with and mentored so many entrepreneurs who tell me they feel there are no financing options out there for their businesses, yet they have zero revenue or aren’t even trying to earn revenue. Here’s the thing: Most businesses never get VC funding, and many can’t even get bank loans when they are starting out. Often, the only way to “make it” is through cash flow.
So before you try alternative financing options, are you selling something? If not, what can you offer to earn money even if it’s not ultimately what you want your main revenue stream to be in the future? I know a video software company that started to earn revenue through video production consulting. Having cash on hand during their shift from a service-based to a product-based business helped them thrive.
11. Angel Investors
If you have a good product, money isn’t hard to come by. The hard part is finding good people who offer a strategic benefit to your company and its development.
To start gathering funding, make an initial round of friends and family and ask them for suggestions and further networking opportunities. Use your parents’ Christmas card list and your very popular sister’s Facebook page. See if you can get someone close to you excited.
Once you uncover a passionate angel investor, you can use generated profit to open a line of credit. The most important aspect in financing decisions is to find personalities that complement yours and people who are excited to invest and stay behind the scenes. If you have a good product, people will give you money.
—Ty Morse, Songwhale