3 Top Financing Options for Startups and Small Businesses. (Part 2)

  1. Community development finance institutions
    There are thousands of nonprofit community development finance institutions (CDFIs) across the country, all providing capital to small business and microbusiness owners on reasonable terms, according to Jennifer Sporzynski, senior vice president for business and workforce development at Coastal Enterprises Inc. (CEI).
  2. Venture capitalists
    Venture capitalists (VCs) are an outside group that takes part ownership of the company in exchange for capital. The percentages of ownership to capital are negotiable and usually based on a company’s valuation.

“This is a good choice for startups who don’t have physical collateral to serve as a lien to loan against for a bank,” said Sandra Serkes, CEO of Valora Technologies. “But it is only a fit when there is a demonstrated high growth potential and a competitive edge of some kind, like a patent or captive customer.”

  1. Partner financing
    With strategic partner financing, another player in your industry funds the growth in exchange for special access to your product, staff, distribution rights, ultimate sale or some combination of those items. Serkes said this option is usually overlooked.

These are some other benefits of working with a nontraditional lender.

Market credibility: The startup gets to “borrow” some of the goodwill that the strategic partner has built up, and working with an established investor lends weight to the brand.

Infrastructure help: The larger partner likely has teams for marketing, IT, finance and HR – all of which are things a startup could “borrow” or utilize at a favorable rate.

Overall business guidance: It’s likely the strategic partner will join your board as part of the investment. Remember that they have a wealth of experience in business, so their advice and viewpoint will be invaluable.

Relatively hands-off partnership: A strategic partner still has their own business to run, so they are unlikely to be very involved in the day-to-day operations of the startup. Occasional updates on your business, such as monthly or quarterly, are usually sufficient check-ins for them.

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