Most entrepreneurs face the dilemma of securing funding when starting a business. Almost every entrepreneur knows about angel investors, and venture capital. However, this solution is not the solution for everyone and it typically available unless you have a proven track record or have built critical mass with your target customers. So how do you fund your idea until then?
Standard Funding Sources
The reality is that not many ideas get funded by angel investors and venture capitalists in the early stage. As a result, what ends up happening is the entrepreneur will scrape together time and resources from your friends and their business networks to get the business up and running. During this phase, the entrepreneur will often incur some expenses until initial revenue can be generated. If family and friends do not provide initial funding, then some entrepreneurs resort to using their credit cards or even personal savings to take the business idea from concept to reality.
The recent financial crisis has created a more difficult situation for entrepreneurs and small businesses because the lending environment is extremely tight; traditional financial institutions are being cautious with their money which makes it harder for a new business to secure a loan.
All is not doom and gloom though. With every difficult period such as this, innovation seems to spring forth. The financial industry is no exception and innovative solutions are emerging to help entrepreneurs make their dreams a reality.
The Alternative Funding Sources
Several alternatives have emerged that connect people who have money to those who need it, and this is great news for those looking to start up a new business: Peer-to-Peer Lending, Microfinance, and Crowdfunding are some of the financial innovations coming out of the Web 2.0 revolution.
Microfinance (or Microcredit): The concept really gained popularity thanks to Mohammed Yunus, Nobel Prize winner and founder of Grameen Bank. Since then, additional services such as Kiva have emerged to help entrepreneurs get started. While sites such as Kiva have primarily focused in third world countries, others have now opened up to US entrepreneurs with help from fantastic organizations like Accion USA and Opportunity Fund.
Crowdfunding: This concept revolves around getting the “crowd” to fund you through widgets and websites. The widgets and websites enable enterprising individuals to raise funds from others through the Internet and through their social networks (e.g. Facebook, Twitter, MySpace, LinkedIn, etc). This concept has worked well for the music industry with sites like SliceThePie.com and SellaBand.com leading the crowd funding movement.
Peer-to-Peer Lending: Last but not least, peer to peer lending sites such as Lending Club or Prosper are becoming increasingly popular as a funding source for entrepreneurs. Also known as social lending and person-to-person lending, this concept refers to financial transactions that occur between individuals without the intermediation of a traditional financial institution. About 7.5% of the loans on Lending Club are used for business purposes for up to $25,000. This option is not for everyone as the borrower must still meet certain requirements such as having a responsible credit history.
In summary, if you have the right idea, the passion, and the drive to make it happen, don’t let it die: give it a chance.