The Funding Food Chain: Options for Small Business Financing
As entrepreneurs and small business owners, we start off by funding our business with what little cash we have or go to friends and family with tin cup in hand to gather up enough capital to get going. At some point, typically sooner than later, we need more cash but Uncle Louie and Aunt Betty have stopped returning our phone calls. It’s time to start exploring other options.
Our first thought is a bank loan. After all, isn’t that what banks do - lend money? Not so fast, Mr. Buffett. We quickly learn the hard way that getting a bank loan is not as easy as their small business-friendly ads make us believe. It’s hard to find data on how often banks reject business loan applications but here’s a link to a somewhat credible source. It says that big banks approve roughly 25% of the loans they consider. Small banks approve just under 50% of their applications. However, this data reflects approval rates of applications that make it to the committees that approve or reject loans. It does not include statistics on most of applications that never make it past the loan officer – and that’s a big number!
So, what about the Small Business Administration (SBA)? Doesn’t the SBA exist to hand out loans to entrepreneurs like us? Nope. In fact, contrary to popular belief, the SBA does not actually lend money. They simply guarantee to repay most of the loan principal that a bank decides to approve, and only after all attempts have been made to get you to repay that loan. The SBA guarantee protects the bank, not us.
After being rejected by a few banks, we then look toward angel investor groups. Angel investors are small groups of local, well-meaning, well-heeled people with high net worth and capital to invest in local businesses. You can find a directory of them here. While they represent a significant amount of investment dollars, in the grand scheme of things, they aren’t much different than banks in the fact that they only finance a small percentage of true startups and entrepreneurial ventures.
So what’s next? After we max out our credit cards, we turn to options like venture debt, Community Development Financial Institutions (CDFIs), accounts receivable financing, and using our IRAs for business purposes. This is when money gets really expensive if you’re able to pull together what is needed to get funding from these sources. Some of us do it out of desperation but this only increases the already heightened pressure to perform.
Relief on the Way! Equity Crowdfunding!
The good news is that equity crowdfunding is a new and viable option for entrepreneurs and small business owners in North Carolina. For the first time, control over the type of offer (debt or equity) and the terms in which the offer is funded are in the hands of the entrepreneur, not the bank or investor. While the type and terms need to be attractive enough to motivate the “crowd” to invest, the small business owner determines the terms of the investment. As a result, they aren’t nearly as Draconian as we see in other funding scenarios.
How does it work, you might ask? The key to equity crowdfunding in North Carolina is 1) compliance with the State’s regulatory requirements (the NC PACES Act), and 2) the successful marketing of an offering to the crowd of investors that can contribute. With regulatory markers set at raising up to $1,000,000 and $2,000,000, the opportunity is now readily available, and we look forward to seeing how this advancement disrupts (in a positive way) the small business climate in North Carolina.