How is Funding For Small Business Changing?

In the startup world, funding is a prominent part of every day business. In the small business world, it is understood in a slightly different way. Small businesses tend to look for funding in more traditional ways but this is changing. By using a more entrepreneurial mindset, smaller organizations are developing products, targeting a particular customer and/or expanding into new markets. This leads to the conundrum of how to find enough capital to not only stay viable but to also fund expansion.

The global economy and many more localized economies are showing growth

You might say the entrepreneurial mindset is a response to the financial meltdown of 2008 which led to a severe international recession. Currently there are indicators that things are getting better, albeit at a very slow pace. The improvement seen in economies has been hard fought in many ways. For the Eurozone and the US, there is a great deal of damage leftover from the recession and a pervasive sense that nothing will ever be the same again. So, now small and large companies are starting to venture forth again to expand their operations. Just this past week, there was a blockbuster deal in the semiconductor industry between Applied Materials and Tokyo Electron. But what about smaller companies? How are they going to continue competing?

There is money to be made

Regardless of the economy, there is always a company recognizing an opportunity and acting on it. And…the company needs capital to act on this opportunity. However, one of the last results of the recession is that banks are more skittish to lend money.

What are the options?

Banks: Banks are still one of the primary sources of funding for smaller organizations. In a Businessweek article, the bigger US banks reported that lending is up. However, the European Central Bank continues to report shrinking lending to businesses.

Investors:  Pitching to angel investors or venture capitalists can be a way for small businesses to raise money for a product launch or other type of expansion.

Small Business Administration (SBA) and govermental agencies: There is always rhetoric about how small businesses are the backbone of a nation’s economy. Agencies like the SBA in the US and enterprise boards can be a good way for small companies to get both advice and funding at reasonable rates.

There is a growing need for alternative funding for established small businesses. Here are some of the other options:

Peer lending: This is a growing trend in investing and business lending. Rather than putting money in a mutual fund, stocks, bonds and the like, investors put small to larger amounts of money into a fund that becomes a loan for small businesses. The loan is managed just like any other loan with interest and a payment schedule.

Crowdfunding: Basically, it is similar to peer lending but it is more of an investment model than a loan model. The difference here is that contributors are looking for something in return. This can be early access to the product(s) and a return on the investment.

If not banks, who?

As small businesses seek ways to grow, they are going to need capital. Investors and lenders still want to know you are worth the money, no matter what. There is great frustration for those applying for bank loans and unfamiliarity with approaching the alternative funding sources. In some places, there are community based funding (like community development financial institutions in the US) that also support small business growth.

When we look at our own towns or visit other cities, we witness how small businesses are coping. Without making sure they have access to capital, we are creating an environment that cannot support the mom-and-pop stores, lawyers, dentists, specialty firms and the like. So, what options do they have for funding and how useful are they for growing companies?

What, if any, effect did the recession have on how small businesses seeking funding?

What types of funding do you see small business accessing in your locale?

Which funding sources are likely to provide the best financing for growing companes?

Which types of alternative funding do you see as becoming the norm?

What advantages does an established small company have in looking at less traditional forms of funding?