Small business guide: Where to find capital

Many small business owners still stop into a bank when they’re in need of a loan. And when founders need financing for a new technology company, most still pitch to angel investors and venture capitalists in person.

However, new technology coupled with new federal rules have made it possible for entrepreneurs to raise capital online.

“In the last year, we’re seeing a lot of new finance companies jumping into the small-business space, many of them using some type of crowdfunding model,” said Kris Roglieri, who owns two commercial lending firms in New York. “More players in this space means more competition, which means a better deal for borrowers.”

More players can mean more confusion, too. So here’s a primer on some of the options:

Bank lending bouncing back

Now several years removed from the recession, banks and credit unions once again have a healthy appetite for small business loans, according to Tony Pica, senior vice president at Capital One Bank.

In part, he says, that’s because the federal Small Business Administration has stripped away some of the administrative hoops and fees associated with some of its lending programs, under which the government guarantees to pay back banks in the event a borrower defaults. As a result, the agency has approved record loan-guarantee volumes of around $30 billion each of the past three years.

“Those traditional sources of capital, like banks and government lenders, are really starting to open back up,” said Elton Rivas, who runs a business accelerator program and a co-working space in Jacksonville, Fl.

Alternative lenders everywhere you look

Meanwhile, several new “crowdfunded” loan services have arrived on the scene. Services like Kiva, Dealstruck and Funding Circle, each with their own twist, allow multiple lenders — be it banks, businesses or individuals — to contribute to a single line of credit for an entrepreneur.

“If you look at the way traditional lenders have operated in the past, if you needed $10,000, you had to find one bank to give you $10,000,” Pica said. “Now, you can instead find 10 lenders to each give to $1,000.”

Roglieri says that loans through alternative lending sites tend to come with a slightly higher interest rate than those approved by a bank. However, because many of the alternative lending platforms don’t have to comply with strict banking regulations, and because they often use straightforward computer algorithms to evaluate businesses, they can approve loan applications in a matter of days or even hours, not weeks.

Crowdfunding for investors ramping up, too

While debt finance works well for traditional small businesses, most technology start-ups are more interested in raising money through private equity investments. And new federal rules have made it easier for entrepreneurs to reach out to investors in droves using the Internet.

One of the key changes was the elimination of a ban on general solicitation, which now allows companies to widely advertise that they are trying to raise funding.

Rivas pointed to Web sites such as AngelList and Wefunder, which maintain lists of accredited angel investors and venture capitalists.

In the coming months, regulators also are expected to approve further changes, allowing companies to raise money from non-accredited investors through online portals, known as crowdfunding sites such as Kickstarter, Indiegogo and Fundable. In the meantime, small businesses can still use those sites to raise money in exchange for some consideration, such as first dibs on a new product.

“We’re seeing more entrepreneurs use crowdfunding for market validation,” Rivas said. “They post a product on a site like Kickstarter, use that money to pay for the first run, and then take that success to an investor or bank lender to show that they already have real sales and real customers.”

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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