Types of Funding
Loans from Community Organizations and Institutions
The main mission of these lenders is to support small and startup businesses. While the terms are still very fair, funders like community organizations often must charge slightly higher interest rates in order to make up for the fact that they are supporting riskier (newer, less proven) businesses.
Often called "alternative lenders"
Provide significant personal assistance, training, and networking opportunities
Offer a wide range of loans, from $5000 - $5,000,000
Many are certified CDFIs*
Are a good option for business or nonprofits who...
- Have less than perfect credit history
- Don't qualify for bank loans
- Are looking for business advising in addition to financing
Loans from Community Banks
These are small banks that draw deposits from and contribute back to the community through local loans.
Have an explicit commitment to local economic development
Can be an excellent source of mid-size loans, generally $100,000 - $3,000,000 but some offer loans as small as $5000
Good for business with industry track records, good credit, and a clear path to repayment
Often provide interest rates that are lower than community organizations
Some are also CDFIs*
0% Loans from Peer-to-Peer Platforms
These are online platforms where borrows and lenders can go to find each other and make loans.
Also called "peer-to-peer"
Still a loan - your friends, family, and fans will need to be paid back!
Often good for entrepreneurs that...
- Have poor credit
- Don't have much cash
- Need small loans ($1000 - $10,000 usually)
- Have friends, family, and fans that will loan them some money
These platforms allow businesses to solicit donations from the public using online tools.
Are donations, not loans - no repayment required
Usually the business gives away rewards to their supporters, like products, naming rights, and vouchers for experiences
Good for businesses who...
- Can tell a compelling story about their business or product using social media, photos, and/or video
- Have large networks of friends, family, and fans who really want to help the business achieve its goal and aren't concerned with getting paid back
Crowd-funding allows a broad range of supporters - regular people, not just wealthy "accredited" investors - to invest directly in a business by providing a loan or an equity investment.
Useful for a business that intends to pay a financial return, but not as much or as fast as typical venture capital funds seek
Can build intimate loyal customers - the investors
Allow regular people to invest in local businesses
Great way for community members to invest in and be connected to/committed to their business
Are a good option for businesses that have audiences with a passion for their community or field - local boosters or foodies, for example
Open a wider net than donations because business can bring in people they don't necessarily know who care about the business' mission and are looking for a return
Two kinds of crowd-funding:
Direct Public Offering (DPO)
Similar to donation-based crowd-funding, businesses announce an opportunity to invest in them, usually through a public campaign, with a website, social media outreach, and videos.
The business offers the investment privately, to people that know the business.
Good option if the business owner thinks that they can raise enough money by asking their network of close friends, family, and community members directly
Has a less onerous and less expensive legal process than DPOs
In California, businesses can have up to 35 investors that don't meet any wealth or income requirements
These are accredited investors - high-net-worth individuals - who the law considers to be better able to manage the risk of a small business investment. Businesses can get funding from them without as much legal work as investment funds that include non-accredited investors.
This Guide lists groups of angel investors that work together to find and vet investment opportunities.
Are good for businesses who...
Expect to provide a high return to investors
Have a cutting edge or compelling product or service that people are inspired to invest in
Do not have cash flow right away to start making loan payments
Interested in business advise and mentorship from investors
Impact Investment Funds
These bring together many socially and environmentally responsible businesses into a fund that wealthier individuals can invest in.
Investors are often looking for competitive, high-return ventures that pursue a double- or triple-bottom line
Energy and health startups, information technology firms, and sustainable food enterprises often catch the eye of these investors
Some Simple Guidelines
Think about community bank and organizational lenders if you...
Need $10,000 - $5,000,000+
Have immediate positive cash flow or a secondary source of income
Can make equal monthly payments
Have at least 4 of "the 5 C's" of credit...
Capacity - You have the capacity to pay back the loan AND all of your other bills
Capital - You personally put money in the business - you showed commitment and have skin in the game
Collateral - Something that you can use to pay back a loan if you run out of cash. For example, real estate, office, or manufacturing equipment, or your accounts receivable and inventory
Conditions - Your business is operating at the night time and place to be successful
Character - You have experience, a good reputation, and in this case, a social mission
Think about donation-based crowdfunding and peer-to-peer lending models if you...
Have a great idea that inspires everyone you tell, but not a lot of money
Have time and connections to sell your idea via online marketing or to your local community
Need $1000 - $25,000
Think about equity financing (Angel, Impact, Crowd Investing) if you...
Will provide a return to investors
Zero in on Angel and Impact Investing if you...
Anticipate fast growth and high return
Would be comfortable selling your business after high growth
Welcome decision-making input from your investors