How Main Street Businesses can Raise Money Like their Wall Street Counterparts
It is well known that small businesses have a difficult time accessing capital to operate and expand their enterprises.
According to The Small Business Majority, a national business organization, “small business owners - particularly women, people of color, and other under-served populations - face significant hurdles accessing capital from banks and other traditional sources. The disparity in government capital support during the COVID-19 pandemic has exacerbated the inequitable economic conditions faced by small businesses nationwide.”
For established businesses, there are opportunities to raise capital through alternative channels. There is an entire ecosystem to tap into. With the right plan in place, entrepreneurs can access the capital that will help them achieve their goals.
Equity crowdfunding is the process of raising funds from individuals online. There are platforms that provide you with the opportunity to showcase your business to thousands of investors, both large and small. Investors review your business plan, your operating history, and financials to determine if they want to invest. Sites such as Kickstarter and SeedInvest offer you the opportunity to sell securities, or a portion of ownership in your business, in exchange for capital. For the right firm, this can be a great way to raise funds.
Peer to Peer (P2P) Lending
Many of us have heard of Peer-to-Peer, or P2P, lending. This is essentially borrowing money from a group of individuals online.
Here’s how it works. You create a business profile, upload your business plan, and financials. Based on the information that you provide and information obtained from your credit bureau report, the P2P platform will assign a credit risk profile to you. The lower your risk profile, the lower your interest rate. The higher your risk profile, the higher your interest rate. The terms can range from a few months to a couple of years. As you build your reputation as a good borrower, your risk profile improves and allows you to borrow more at better rates. Companies like Funding Circle have been helping business owners obtain financing to grow.
This is a great alternative to traditional lending options.
For larger enterprises who are looking to raise millions of dollars, private placements are a viable option.
A private placement is the private sale of your securities to a limited number of high-net worth individuals or institutions. These placements are usually structured as long-term debt, similar to a bank loan, and secured by your business’s assets. Private placements are issued by brokerage firms or investment banks and sold to their network of investors. The costs associated with issuing a private placement may be out of reach for the smallest of businesses but remains a viable option for many others.
Although small businesses have a steeper hill to climb to obtain equity or debt financing, there are opportunities available. The marketplace is filled with hundreds of options for start-up businesses and mature enterprises. By developing a financing plan for your business, you can identify potential partners and choose the right platform that will work for you.