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In today's fast-paced business world, companies are always looking for ways to access capital quickly and efficiently. One option that has become increasingly popular is invoice financing. This lending method allows companies to use their outstanding invoices as collateral to secure a loan, providing them with the funds they need to cover operating expenses, payroll, and other costs associated with running a business. In this article, we'll take a closer look at how invoice financing works, its requirements, costs, pros and cons, and how it differs from invoice factoring.

What is invoice financing?

Invoice financing, also called accounts receivable financing, is a lending method in which a company uses its outstanding invoices as collateral to secure a loan. Normally, lenders require some sort of company asset to act as collateral. However, with invoice financing, unpaid invoices are the asset. This process is usually faster than other small business loans, both in terms of application and receipt of funds.

One thing businesses should keep in mind about invoice financing is that the full invoice amount is not given. While it depends on the lender, companies are typically only able to borrow up to 80% of their accounts receivables. 

Invoice financing requirements

To qualify for invoice financing, businesses need to meet a set of specific criteria. First and foremost, your business must have outstanding invoices from reputable clients, as these will act as your collateral. Generally, lenders prefer invoices due to be paid within 90 days.

Second, it's crucial that your business has a solid track record of successful transactions with its clients. High levels of disputes or returns can raise red flags for lenders. In other words, a history of strong customer relationships can make your business more attractive to lenders.

Third, many lenders also require a minimum monthly revenue of $10,000 to qualify, ensuring a steady cash flow and loan repayment capability.

Finally, industry preference is also another factor that lenders consider. Some sectors are more favorable to lenders due to the predictability of their cash flow and lower risk levels. However, this varies by lender and it's always best to check with your potential lender about their preferred industries.

Remember, each lender may have their own set of requirements, so be sure to do your research and understand the terms before you apply.

How invoice financing works.

Here's what to expect with invoice financing. Once approved, you'll receive a cash advance based on a percentage of the outstanding invoice (usually around 80%). You can use those funds for whatever operating expenses you need, such as payroll or inventory. When your customer pays the outstanding invoice, you pay the lender back along with the agreed-upon fee.

Invoice financing example

Let's explore a concrete example to better understand the process of invoice financing:

Imagine you own a small tech company, "Bright Future Tech," and you've recently completed a large project for one of your clients. The client is happy with the work, but they operate on a net 60 payment term. That means you won't see the payment for two months, but you have bills that need to be paid now.

Bright Future Tech has an outstanding invoice of $100,000 from the client. You approach a lender for invoice financing. The lender agrees to provide you with 80% of the outstanding invoice amount, which is $80,000. This cash advance helps you to manage your immediate operational costs.

After two months, when your client pays the invoice in full, you then repay the lender the $80,000 you received upfront, plus any fees associated with the loan. In the end, invoice financing has enabled your business to maintain a healthy cash flow, despite the lengthy payment terms of your clients.

Costs associated with invoice financing.

You do have to pay the invoice financing company for getting the advance. Instead of a factoring fee (as you'd pay with invoice factoring), you'll pay an ongoing percentage of the invoice amount until your customer pays.

For instance, your financing terms might have you pay 3% of the outstanding invoice every month. On a $10,000 invoice, that would be $300 per month. These costs can quickly add up if your customer is extremely late in paying.

Invoice financing pros and cons

Companies in need of working capital—or who need help financing a purchase order—may find their borrowing needs met with invoice financing. However, there are other loan products on the market that may be a better fit. When choosing an invoice financing lender, make sure to compare its rates and fees with its competitors to ensure you get the best one. 

Ready to get paid sooner? Apply for accounts receivable financing today with Lendio. 

While there’s no specific loan product called a “payroll loan” for small businesses, there are several business financing options available that can be used to cover payroll expenses. This allows you to keep your operations running smoothly, even if you're experiencing short-term cash flow issues.

Benefits of Payroll Financing

Covering payroll is one of the top four reasons business owners get a loan with Lendio. 

Getting funding for payroll takes the worry out of supporting your employees each month when your cash flow is inconsistent. It's usually short-term financing that helps you bridge the gap on your payroll expenses, whether you're a seasonal business or simply have a long accounts receivable timeline. 

There are a few different types of payroll financing. Some are better suited for certain types of businesses than others. So it's smart to explore each option and find the one that makes the most sense for your unique company.

There are several perks to getting a business loan through Lendio to cover payroll costs, including:

• Multiple options for different stages of business - Choose a financing structure with repayment terms that work for you. There are many options out there, whether you're a new business or already established. 
• Easy application process - Lendio’s 15-minute application process is quick and easy to complete.
• Quick funding times - Depending on the lender, you could get approved and funded in just a few business days (sometimes even less). No matter how unexpected your financing needs may be, you can solve the problem in very little time. 

4 Types of Financing For Covering Payroll

Here are common options to explore for payroll financing. 

Term Loans

A term loan provides you with a lump sum that you can use as working capital to support your company's payroll and even other expenses, if you choose. The interest rate and monthly payments are both fixed, making it easy to budget for.

Compared to other financing options, a term loan's interest rate can be much lower. Plus, the online application is typically fast, and you'll enjoy a quick funding time once approved.

How to Qualify

In order to apply for a term loan, your business must be at least six months-old. There's also typically a minimum personal credit score requirement that starts at 600, and your company's monthly revenue needs to be a minimum of $8,000.

Lenders will also want to see a strong financial track record that demonstrates your ability to repay the loan. If you're a well-established business with solid financials and credit, then you could have a good chance of getting approved for a term loan to cover payroll gaps.

Line of Credit

A business line of credit (LOC) is a great option for payroll financing because you draw funds from your LOC only as you need them. If your cash flow issues aren't consistent, a LOC acts as a convenient safety net.

And once you repay your balance, your available credit replenishes. You can borrow funds again the next time you need to cover payroll or other operating expenses. Plus, you only accrue interest on the drawn funds, instead of one large lump sum.  

How to Qualify

To qualify for a line of credit, the minimum time in business requirement starts at six months. Annual revenue must be at least $30,000, and the minimum credit score to apply is just 600.

You can opt to apply for two types of lines of credit: secured or unsecured. With a secured LOC, you offer some type of collateral. Because of this extra layer of security for the lender, you may qualify for lower rates and a larger credit line. An unsecured LOC, on the other hand, doesn't require you to risk any assets, but you'll likely pay more for the credit line and qualify for a smaller amount.

Cash Advance

A cash advance lets you borrow against your business' future revenue. It's an option that relies more on your business finances than your personal credit score. Plus, a cash advance comes with a quick funding time. 

The repayment process is unique, however, and can vary. In some cases, your lender automatically withdraws a fixed daily percentage from your bank account. In others the lender will withdraw a fixed dollar amount daily or weekly. In the case of a merchant cash advance, the lender requires a fixed daily percentage of your credit card receipts. The repayment process continues until the full borrowed amount—plus a factor rate charged by the lender—is paid in full. 

How to Qualify

In order to apply for a cash advance, you'll need between four and six months of bank statements or receivables. The application itself typically takes just 15 minutes. Although the cost may be higher than those of other payroll financing options, you likely don't need to provide any collateral. Eligibility is primarily based on your sales, along with a minimum credit score starting at 500 and time in business requirement starting at three months. 

Invoice Financing

Another option for covering payroll costs is invoice financing (also called accounts receivable financing). It's similar to a cash advance except that, instead of basing your funding on future sales, it's based on your business' unpaid invoices.

You can apply to borrow up to 80% of your outstanding receivables, which can include inventory and purchase orders, in addition to invoices. Once your invoices are paid, you repay the balance to the lender, plus a factor fee of around 3%. 

How to Qualify

Eligibility requirements center around your receivables rather than your credit score or other factors. Plus, you can qualify with a shorter time in business requirement of no minimum to one year.

Stop worrying about meeting your payroll each month by finding the right financing solution for your business. Learn more about small business loans through Lendio.

The information provided is accurate at the time of the initial publishing of the page (INSERT DATE). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application.

Financing real estate development can be costly and expensive. From clearing the land and grading it, to installing roads and necessary infrastructure, there are a variety of expenses involved that can be cost-prohibitive for both individuals and real estate developers. This is where a land development loan, or a real estate development loan, comes in. It provides the funds needed to get any piece of land ready for development. 

Dive into land development loans below and learn everything you need to know about them for your next project. 

What Kind Of Down Payment Is Required With A Land Development Loan? 

While lenders are willing to fund a land development project, they typically require a larger down payment, since the land does not have that much value. The value could increase once it’s developed, but buyers could default on payments before any significant value has been established. Because of this, lenders often require a down payment between 25% and 30%.

Can The Land Itself Act As Collateral For A Land Development Loan? 

The land can act as collateral to secure the land development loan, but there are two things to keep in mind that may prevent this from happening:

• The development loan is more than the purchase price of the land.
• The land is still serving as collateral for a land purchase loan. 

If the development loan is more than the current value of the land, then additional collateral may be needed. 

For the second scenario, the land will most likely not be able to be used as collateral because it’s already tied up with another loan. Sometimes lenders are willing to take the risk of securing a loan with an asset that has already been collateralized, but it’s not a guarantee. The reason is that, as the second lender, they would not have the first right to the asset if the borrower defaults on their loans. That's why many lenders are not willing to accept an asset that has already been used as collateral.  

Lenders that do accept collateralized assets typically already have an existing relationship with the borrower and have confidence in their ability to repay the loan. However, even with a positive history, they are still likely to charge a higher interest rate than they would otherwise.

What Are The Interest Rates For Land Development Loans?

The interest rate on property development loans will vary from borrower to borrower, depending on the loan amount, credit score, down payment amount, and collateral used to secure the loan. Overall, land development loan rates are higher than small business term loan rates because of the greater risk. 

Also, keep in mind that interest rates aren’t the only cost associated with a land development loan. Other costs include:

• Appraisal fees
• Loan origination fees
• Survey fees

Speak with a loan officer to get a better understanding of land development rates and commercial mortgage rates. 

How Long Is The Repayment Period For A Land Development Loan?

Repayment periods for land development loans are usually between 3 and 10 years, but exact lengths vary between lenders and borrowers.

Pros and Cons of Land Development Loans

How Much Does it Typically Cost to Develop Land?

There are many factors that impact the cost of developing land. Assuming the land has already been purchased, variables that influence how much it will cost to develop land include:

• Geographic location
• Size of property
• Location of property, which may require:
• Rock removal
• Tree removal
• Grading
• Permits needed, which may include:
• Zoning
• Building
• Environmental
• Infrastructure needed, which may include:
• Power lines
• Sewer lines
• Water lines
• Roads
• Sidewalks
• Internet

Depending on what needs to be done and where, land development can range from tens of thousands to millions of dollars. 

Are There Other Types of Construction Loans? 

There are several types of construction loans, some of which include mini perm loans, A&D loans, and interim construction loans. Here's what you need to know about these options.

• Mini perm loans - Typically has a three- to five-year loan term and is used to finance the construction or renovation of a commercial property, often requiring a balloon payment at the end of the term (although this can often be avoided through refinancing)
• A&D loans - Standing for acquisition and development, can be used for both the purchase of land and its development 
• Interim construction loans - Covers the costs of construction, with borrowed money coming in installments, and lenders typically only requiring interest-only payments during the actual construction process  

A land development loan helps cover the expenses related to getting undeveloped land ready for construction. Land clearing, grading, and installing infrastructure can all be very expensive, and a land development loan helps pay for those costs. However, there are other types of commercial real estate construction loans that may also work, too. Other options include mini perm loans, interim construction loans, and A&D loans. 

Learn more about commercial property loans today with Lendio. 

When most entrepreneurs need funding to start or grow their business, they quickly learn one key fact: They need a business plan.

Just as you need a resume to apply for a job or a completed application to gain admittance to a university, business plans are required to apply for business financing.

And like resumes and college applications, business plans are viewed as a necessary evil by most entrepreneurs.

Yet, this shouldn’t be the case. Because unlike completing your resume or college application, the process of completing your business plan has been proven to improve your success—not only in gaining funding, but when executing on your business.

Why Business Plans are Important for Securing Funding

Business plans are a critical part of most business loan requirements. Funding sources like lenders and investors often review written company materials before investing. In the public markets, they review annual reports and other financial filings to determine the health and prospects of a company and whether or not they should invest.

The same process holds true when assessing private companies like yours. You need to present a business plan that paints the right picture of your business: one that gets investors and lenders excited to work with you. Here are some reasons to invest the time in creating an in-depth business plan. 

It Acts Like an Annual Report

Look at your business plan like a public company’s annual report. In an annual report, you’ll quickly notice that it’s much more of a marketing document than a research report. Annual reports include quality pictures and graphics, they highlight the company’s top accomplishments, and they paint a pretty picture of future prospects

You should also include market research on competitors. Instead of a massive data-dump, however,  paint a picture of your company's path to success in the future. 

It Sets Clear Milestones

The process of writing a business plan is a good exercise for internal stakeholders as well. It helps you formalize your company's goals and identify the steps you need in order to get there. Funding sources want to see that the business has a strategic plan for every anticipated stage of growth.

It Minimizes Risk

With milestones and a strategic vision in place, you'll have the focus of where to prioritize financial and human resources. You can identify potential issues based on those strategies and create backup plans before issues arise.

What to Include in a Business Plan for Funding

There are four primary components of a business plan: executive summary, the market analysis, financial details, and the funding request. Here's what to include in each section to maximize your chances of success.

Executive Summary

Start your business plan with an executive summary that provides a quick overview of the most important points from the rest of the business plan. It’s also a chance to introduce the company as a whole such as its mission statement, products and services and management team.

Market Analysis

Detail the target market need or pain: All great companies solve a real customer need or pain. Create a solution and understand both the size of your market and the future trajectory. Is it growing or shrinking? 

Detail both your direct and indirect competition. If there is a real customer need or pain, other companies must be trying to solve it already. In your plan, you must detail how they are solving the need currently. For example, when eBay first launched, it realized that the need for selling personal products was being met by yard or garage sales (indirect competition). This proved that there was a market need or pain.

While researching competitors for your business plan, explain what both their strengths and weaknesses are and pinpoint your strategy for differentiating your own company. 

Financial Information

Provide detailed information on how the company is currently performing and create a credible financial model. Creating a financial model that shows your company's sales skyrocketing could do more harm than good. Investors and lenders understand that all businesses have ups and downs and that all growth takes time.

In developing your financial model, think through the timing of your growth projections. How long will it take to hire and train the right employees? How long will it take to repeatedly get your marketing message in front of customers until they buy? These processes generally take longer than you initially think. And during this time, you are often incurring expenses and generating less revenue than projected, which could result in a cash flow crunch.

Be careful to consider slower growth scenarios so you don’t run out of cash.

Funding Request

There are a few key sections to include in your requests for funding.

First, clearly state how much total funding you need, as well as the timeframe over which the funds will be used. Instead of grabbing a random number, give a detailed explanation of why and how the funds will be used. 

Also, outline any specific terms and conditions you need. Are you looking for an installment loan, line of credit, or another type of funding structure? All of these details should be answered as part of the funding request.

Finally, provide information on any loans you already have and what your expected repayment plan for the existing loan and the new loan would look like.

The right business plan will get investors and lenders excited to write you a check that allows you to dramatically grow your company. And the right plan will keep you and your team motivated and on track to achieve your long-term objectives. So, don’t treat your plan as a necessary evil. Rather, treat it as an investment that can give you a significant ROI.

When financing major equipment for your small business, many lenders may require you to purchase a specific type of insurance that protects the value of your purchase. It's called equipment breakdown coverage and helps you pay for repairs caused by covered events. Here's what you need about this type of insurance and why it's so important. 

What is equipment breakdown coverage?

Many businesses rely on equipment to keep operations running smoothly. Whether you run a restaurant with tons of kitchen appliances or a construction business with heavy equipment and machinery, it's important to keep everything up and running so you can keep your customers happy and your balance sheet healthy.

Equipment breakdown insurance covers repair costs when certain events occur. If your equipment is financed, your lender may require you to have a policy in place. Even if your equipment is paid in full, this coverage can still be useful. Note that this coverage is separate from your commercial property insurance, which covers only damage due to external factors such as fire or theft.

When a covered event occurs, you can file a claim to get paid to fix the equipment. There's usually a limit to how much each piece is covered for, and you may also have to pay a deductible before your coverage kicks in.

What does equipment breakdown coverage cover?

Here are common events that are covered in most equipment breakdown insurance policies. 

Covered incident repairs.

Your list of covered incidents will likely vary depending on the type of equipment insured. Damage caused by power surges, burnouts, or other mechanical breakdowns are typically covered. And you could also be covered for any related inventory damage because of the breakdown. For instance, if your restaurant's refrigerator stops working, you could be reimbursed for any food spoilage in addition to the actual repairs.

Temporary or rush repairs.

Working equipment is vital to the success of your business. That's why your policy should also include coverage for rush repairs and temporary fixes. You need to keep operations running, even if it costs more to get a contractor out there the same day. You'll minimize the financial impact of your equipment breakdown on your broader business. Check policy details to understand any restrictions surrounding rush repairs. 

Lost business income.

There are many requirements your claim must meet in order to be eligible for lost business income coverage. But it's an important component that's usually included in this type of insurance policy. 

The idea is to get reimbursed for any revenue you couldn't collect because of an equipment breakdown. There must be a direct and well-documented correlation between the loss of income and damage to your equipment. There may also be a minimum interruption period you must get through before your policy goes into effect.

Property damage liability.

Liability coverage is a must for any business and your equipment coverage insurance should have a property damage clause. This provides reimbursement for anyone else's property that is damaged related to the equipment breakdown. 

Mandatory inspections

Another benefit of equipment breakdown insurance is that your policy may cover mandatory inspections. The goal is to identify issues before they arise, ultimately saving you (and your insurance company) money.

What equipment breakdown insurance does NOT cover.

Not all issues are covered by an equipment breakdown insurance policy. Here's what won't be covered, so you can plan accordingly.

• Damage from everyday wear and tear - Breakdown due to age or lack of maintenance is not included in most policies. 
• Software or data - Software-related malfunctions, even if purchased with equipment financing or equipment leasing, are not included in your coverage. You'll need separate business insurance to cover cyber attacks and any other issues related to software.
• Repairs beyond coverage limit - Your policy will come with a limit to how much you can claim with each covered event. It's typically based on the value of the equipment (or a percentage of that value).
• Deductible or coinsurance - Your insurance policy may come with a deductible, co-insurance, or both. A deductible is the amount you're responsible for with each claim before your coverage kicks in. Some policies may also include coinsurance, which is a percentage of the repair costs that you're responsible for.

How to use equipment breakdown insurance with equipment financing.

Most lenders require that you get an equipment breakdown policy whenever you finance your equipment. It's a smart financial safety net that keeps your important assets covered so you can avoid setbacks to your business when issues arise. As you explore adding more equipment to your business, remember this added cost of insurance as well. Preparation is always the key to success.

Learn more about how equipment financing can help grow your business with Lendio.

Private equity (PE) is often tangled with venture capital (VC) because they both invest in companies and use a variety of exit strategies, such as selling their stake during IPOs. However, there are some significant differences in the way they do business. Both invest in different types and sizes of companies, spend different amounts and even claim different percentages of equity.

Let’s have a closer look at the core differences between PE and VC firms, and try to characterize the variables that are pushing them to adopt one another’s strategy.

Private Equity

What is Private Equity?

Private equity is a form of investment that is much more hands-on than a venture capital investment. Instead of investing to own a stake in the company, a private equity firm acquires the entire company in the form of a buyout. 

Usually, the company in question is facing some type of difficulty or is distressed in some way. The PE firm evaluates the company and has a plan for how to resurrect it and make it more valuable. There's also usually an exit strategy in mind to sell the company within a few years in order for the PE firm to turn a profit. 

Who funds these private equity deals? In most cases, the answer is institutional or accredited investors. This includes investors such as:

• Pension funds
• University endowments
• Insurance companies
• Sovereign wealth funds
• High-net worth individuals or family offices

Types of Investments

Private equity funding can be packaged in a few different ways. The most common types of deals are buyouts, secondary buyouts, and carve-outs. Here's what each of these means.

Buyout 

This is the most well-known of private equity deals. A PE firm acquires an entire company to gain complete control of major decisions. The strategy can be used on private, public, or closely held companies. 

Secondary Buyout 

With a secondary buyout, a PE firm buys a company from another private equity group instead. The reasoning may be to fix a distressed company or to acquire a company to work with other relevant companies owned by the purchasing PE firm. 

Carve-out 

Instead of purchasing an entire company, a carve-out allows a PE firm to purchase a certain division of a company. It usually does not involve the parent company's core operations.

Venture Capital

What is Venture Capital?

A venture capital (VC) investment is a type of private equity, but instead of focusing on established companies, investors typically pick startups with the potential for major growth. VC investors can include individuals, investment banks, incubator programs, other types of financial institutions, and corporations.

In exchange for an investment, venture capitalists typically gain ownership of a percentage of the business. When profits are distributed or the company is sold, the investor gets that percentage of the total. 

For example, if a VC investor invests $250,000 for 15% equity, then the startup gets acquired five years later for $10 million, the investor's 15% stake will result in a $1.5-million payout. 

Types of Investments

There are usually two types of investments venture capitalists make in startups: an initial seed round of funding or a range of series funding as the company becomes more established.

Seed Funding

This is typically the first round of formal investment for startups. Some may have had a pre-seed funding round, which usually just raises capital from the founder's family and friends. In the seed round, the startup is still at an early stage, but has a concept and early proof of concept to entice VC investors.

Series Funding

As the startup becomes more established, it may opt to engage in additional rounds of funding. Each round is given a new title in succession: series A, B, C, D, and even E funding. Typically the company raises more money in each round.  

• Series A funding: $2 to $15 million
• Series B funding: $7 to $10 million
• Series C funding: average of $26 million

Private Equity Vs Venture Capital

Core differences: PE Vs VC Firms

Private equity firms buy established, inefficient companies, take total control, and make them more efficient to escalate revenue. They also attempt to capitalize on mispriced assets. 

Venture capital firms, on the other hand, purchase only 50% or smaller stakes in startup companies that they believe have the greatest growth potential.

While PE firms invest in a specific company and concentrate their expertise on a particular sector, VC firms like to diversify and reduce their risk profile. Usually, VC firms are limited to technology, biotechnology, and clean air companies. VC firms also often limit their investment to $10 million in each company. PE firms are open to how much they invest, particularly since they're usually buying out an entire company.

The core difference between the two is where they put their money. PEs invest in established businesses while VEs invest in startup growth.

Risk and Return

VC firms understand that most of the companies they invest in will not be profitable. But  they expect that at least one of them will turn in huge profits and make the fund profitable. Because startups can be so unpredictable, they basically hedge their bets across multiple investments. 

Fred Wilson, a $1-billion, New York-based VC fund, expects that out of the 25 growth companies it has invested in, about 10 will fail, one will turn extraordinary profits, about five will give solid returns, and the rest will be wiped out. 

Another key difference between VC and PE? VC firms use only equity to finance their purchases, but private equity investors use both equity and debt.

Additionally, PE firms have concentrated exposure in one or a few particular industries, so they have to bear additional risk. Their holdings in the companies are so extensive that, if one of the companies failed, the fund would mostly fail. However, shouldn’t higher risk translate to higher returns?

Modern portfolio theory proposes that greater risk is compensated with higher returns, but here, VC firms, even with the higher risk, are targeting the same returns as PE firms, and actual returns for both, are also very similar.

Small business owners who want to retain full ownership of their companies will most likely want to avoid outside investment. 

Instead, apply for a small business loan to get the exact amount of financing you need without having to give up equity in your company. 

Crowdfunding is a term used to describe individuals coming together to support—and directly fund—projects by other individuals and organizations. For small businesses and startups, crowdfunding can be an engine for job creation and development.

Compared to other methods of raising money, crowdfunding is very new, but has nonetheless already provided many businesses with the capital they needed to jumpstart and expedite their growth and potential.

Types of crowdfunding.

Types of crowdfunding.

Prospective and established small business owners can use crowdfunding platforms to jumpstart their next project, and there are four models of crowdfunding they employ to do so:

• Donations, philanthropy and sponsorship - Like it sounds, this form of crowdfunding involves people donating money for nothing in return.
• Lending - Also known as peer-to-peer lending, this model involves individuals lending a certain amount of money to be repaid with interest.
• Equity-based crowdfunding - The company sells shares of the company.
• Rewards-based crowdfunding - Anyone who donates money receives a reward, such as a discounted product or swag.

Anyone with questions about crowdfunding should first decide what they’re willing to give (if anything) and how they intend to excite potential donors to invest in their company.

How crowdfunding works.

How does crowdfunding work for businesses?

For a business that wants to use crowdfunding to raise capital, the first step is to decide what type of crowdfunding it wants to pursue. All types are available to small businesses, but there are benefits and drawbacks to each. 

Businesses that want to avoid paying additional taxes may want to steer clear of a rewards-based crowdfunding campaign. While the reward is given in exchange for a "donation," to the IRS, it is a sales transaction and is considered taxable income. 

To start a crowdfunding campaign, you’ll need to choose a crowdfunding platform. Crowdfunding platforms revolve around a specific type of crowdfunding. They're all a little different and are often aimed at specific demographics.

Once you've decided on the type of crowdfunding campaign you want to run, you will need to create a campaign page that explains what you need the money for and how you intend to spend it. Successful campaigns often provide videos to help motivate and excite donors.

Do crowdfunding sites charge money?

Yes, they do. The amount varies with each site, but it’s not uncommon for platforms to charge 5% or more of the total funds raised, plus a transaction fee for each donation. If you have an exact amount you need for your small business, you’ll need to calculate the fees when determining how much you need to raise.

Can crowdfunding money be used for anything?

Any money raised through crowdfunding must be used for the exact purpose stated to the public. Therefore, if you state that you need the money to cover manufacturing costs, you cannot turn around and use any funds raised to purchase stock or real estate.

Crowdfunding pros & cons.

The pros and cons of crowdfunding.

Consider the following pros and cons when considering using crowdfunding to fund your business.

Pros:

• Serves as a marketing tool - Crowdfunding can be a company’s first exposure to the world and can therefore be used as a means to advertise to the general public
• Provides a forum for feedback on the project - It’s common for investors to provide needed feedback on a service or product they have invested in; this feedback may be essential for your company’s long term success in the market
• Fees are minimal - Crowdfunding platforms take only a small percentage of the funds you raise from investors 
• Inexpensive way to raise funds - No traveling is needed to speak with investors, nor does it cost that much to establish. You can spend money to launch and run a campaign, but the amount you spend is up to you.
• Can make it easy to communicate to your investors - With all of your investors in one spot, communicating to them is a lot easier.
• May not have to give up equity depending on which type of crowdfunding campaign you choose - Equity crowdfunding is just one type of crowdfunding. Other methods don’t require selling portions of your company, which means you will be able to keep more of the profits for yourself.
• Is a valid alternative to bootstrapping and debt - Not too long ago companies had very few options when it came to raising money, but crowdfunding has changed that.
• Can create excitement over your project or product - Smart companies realize that raising money through a crowdfunding campaign is only one benefit—the other is generating buzz and excitement pre-launch. 
• Provides partial proof of concept - While a successful crowdfunding campaign is not complete proof of concept, it is still a very good sign. Full proof of concept is only established once the product or service is launched and is financially successful

Cons: 

• Often limited on amount of funding you can raise - Companies can not raise more than $5 million in a 12-month period
• Exposes project to the public, risking copycats - it’s not uncommon for companies to avoid crowdfunding altogether if they are currently unable to afford a patent because some companies use crowdfunding sites to get ideas for new products 
• Funds may be subject to securities regulation - Companies selling securities via crowdfunding must comply with all federal security laws, regardless of the platform they choose
• Takes a lot of work to find investors - It’s unlikely investors will find your page on their own and give you money. Successful campaigns often involve full-blown social media activity to attract attention.
• Takes a lot of work to create a campaign - Making a donation page, shooting a video, and filling out all of the appropriate paperwork takes more time than you may be willing or able to give.
• Dwindled influence of the crowdfunding model - Thanks to too many scammers, some investors have grown weary of crowdfunding altogether.
• Does not necessarily show proof of concept - There are many examples of "successful" campaigns that did not translate to the real world of business. 
• Can be expensive to get going - If you contract your campaign’s creation, you may end up having to spend more than you want.
• Too much competition on crowdfunding sites - Just creating a campaign is unlikely to be enough, and it can take a lot of work to have your project stand.

Crowdfunding sites

Crowdfunding sites

Popular crowdfunding sites include:

• Indiegogo
• Classy
• Seedinvest
• FundRazr
• Fundly
• Startengine
• GoFundMe
• Mighty Cause
• Kickstarter
• Fundable
• WeFunder
• EquityNet
• Patreon

To choose the best crowdfunding site, decide which type of campaign you want to create and compare the fees charged on each. It’s rare for investors to scroll through campaigns. Instead, many learn about investment opportunities on forums and social media. Therefore, don’t worry too much about where you launch your campaign because everything comes down to how it’s promoted. 

Crowdfunding tips

Tips for a successful crowdfunding campaign.

Like any other type of business financing, crowdfunding requires strategic thought, upfront work and a commitment to reach out to potential investors. Consider the following tips when planning your crowdfunding project.

1. Choose the right site for you - Some sites occupy a specific niche, such as arts or nonprofits. Find the one that fits your business and your ideal donor demographic. You can run multiple campaigns at the same time through different sites, but you will want to consider how. 
2. Set a realistic target and time limit - Asking for too much or too little can affect your project’s chances of success.
3. Create a campaign video - A personal touch—which video excels at— can pay off. In fact, projects with videos outperform those without by 125%.
4. Post regular campaign updates - Keep supporters engaged to maintain momentum. The more buzz and excitement you can generate and maintain for your project, the more likely your donors will recommend your project to their peers. If done correctly, they may even promote your campaign for you. 
5. Connect with friends and family first - Begin with word of mouth among your inner circle, then promote your campaign on social media. Some donors are more likely to contribute if they feel the campaign is already in motion and gaining traction. 
6. Offer rewards - Supporters may be more eager to back you if you offer a small incentive. Just remember that doing a rewards-based crowdfunding campaign means you will pay tax on any money received. 

Crowdfunding is an exciting new way to raise money for your small business, and there are a lot of opportunities to be had. However, you may still require additional capital after your campaign ends even if it is successful. 

Learn more about your business funding options today at Lendio.

For business owners and entrepreneurs with a large amount of savings, the main obstacle to starting a business is often coming up with a viable idea. Yet many aspiring entrepreneurs have a different problem—the idea is there, but the capital isn’t.

Startup funding or startup capital is something that every new business needs to get off the ground. As an entrepreneur, however, the challenge is figuring out where to find the startup funding you need to launch your new business. On a positive note, there are many startup funding options available if you know where to look.

How do startups receive funding?

Accessing startup financing can be a struggle. Traditional banks rarely offer business loans to brand-new entrepreneurs. Before lending any funds, many lenders prefer to see a proven financial track record that demonstrates an ability to repay the funds a business loan applicant is seeking. Without that financial history, the lender does not have the foresight to predict whether your venture may be successful enough to make good on your obligation.

These challenges create quite a conundrum for would-be entrepreneurs. How do you get the capital you need to get your startup off the ground when banks are unlikely to approve you for traditional business loans? 

The good news is that there are multiple ways small business owners can find the startup funding they need. Some entrepreneurs find alternative financing options to fund their startups, some turn to investors, and others rely on self-funding to get the job done. Additionally, there are a few out-of-the-box ways to access startup capital available. One of the key ways to succeed as a new business is to find the right combination of startup funding that works for you.

Startup funding stats.

• 54% of SMB ownersstarted their business with personal funds with another 12% relying on friends and family. 
• 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
• The average loan amount for a small business owner is $47,000.*
• A small business has a median of five employees when it is first funded by an outside lender.*
• A small business has been in business for about three years (a median of 40 months) when it is first funded by an outside lender.*

*Based on internal Lendio data of 300,000+ loans funded since 2013.

Types of startup funding.

Below are 11 types of business funding that are available to startups. Read on to discover whether one or several of the following startup funding options might be a good fit for your new business. 

1. Alternative business loans

Small business loans from alternative lenders can be a solid funding resource for new startups. These loans often feature more lenient qualification standards compared with traditional business loans. As a result, alternative business loans may be a better fit for new businesses that are unable to qualify for other types of business financing. 

In addition to less stringent requirements, alternative business loans also feature other benefits such as credit-building potential and faster funding speed. And these small business loans may offer more flexibility when it comes to how you use the money you borrow as well. 

2. SBA startup loan

The Small Business Administration (SBA) is typically known for providing loans to established businesses. However, that doesn’t mean there’s no hope for an entrepreneur who’s trying to get their new business venture off the ground. 

If you are able to meet the SBA’s borrowing requirements, you may be able to qualify for an SBA loan even as a startup. Generally, these loans are available to partially-financed startups. The SBA likes to see the business owner have some “skin in the game” with around 30% of the owner’s own money in the business. The SBA also prefers to work with startups where the owner has some experience in the industry and in management.

It’s also important to note that the SBA itself does not issue loans. Rather, the agency establishes the guidelines for an approved intermediary and guarantees a percentage of the loan (in the case of default) which minimizes the risk to the lending partners. This financing vehicle is available to small businesses when funding is otherwise unavailable on reasonable terms. To learn more about SBA loans for startups, or to see if your business qualifies, check out this helpful SBA loan guide.

3. Microlenders

Entrepreneurs who cannot secure startup funding from other sources may also want to consider working with microlenders. Microlenders are often non-profit organizations that offer loans to small business owners—sometimes including startups—for small amounts. The loan amounts from microlenders can vary, but frequently range from $5,000 to $50,000. 

Some microloans are available to specific categories of small business owners, such as women-owned businesses or minority-owned businesses. But other microloans may be obtainable by entrepreneurs that fit in broader categories. 

The Small Business Administration also offers a microloan through SBA funding intermediaries for up to $50,000. The SBA micro loan option does not require any collateral from the borrower and is available to eligible businesses, including startups. 

4. Business line of credit

Business lines of credit are among the most flexible ways to help fund your startup. These credit lines can provide a business owner with quick capital, which they can use to meet a variety of business needs or resolve a cash flow gap.

When you open a business line of credit, the lender gives you a credit limit which represents the maximum amount you can borrow on the account. You are not required to use any of the funds until you need them, and the lender only charges interest when you access your credit line. 

As you repay the money you borrowed, you also eliminate the interest the lender charges you. At the same time, you regain the ability to borrow against the same credit line again in the future—up to the credit limit—as long as the account remains open and in good standing (and the draw period is active on your account). 

5. Business credit card

A business credit card could be another helpful type of startup funding to consider when you open a new business. Even if your business is brand new, you might qualify for this type of account if you have a good personal credit score. 

There are many ways that a business credit card may benefit your new startup. First, a well-managed business credit card might help you build good business credit for the future, if the card issuer reports the account to one or more of the business credit reporting agencies. And a business credit card can also be valuable for helping you keep personal and business expenses separate. 

You can also use a business credit card to help you manage business cash flow. However, it’s best to pay off your full statement balance each month if possible to avoid paying expensive interest charges on the account. 

Finally, some business credit cards feature valuable rewards or cash back benefits. And while you should never spend extra money to chase rewards, there’s nothing wrong with earning extra perks on purchases that you already need to make for your business anyway. 

6. Crowdfunding

Crowdfunding is another strategy that some entrepreneurs use to generate funding for new startups. Websites like Kickstarter and Indiegogo are examples of helpful tools that can help entrepreneurs raise small amounts of money from a large number of investors. 

In addition to equity crowdfunding (as described above), some small business owners use debt crowdfunding to borrow small amounts of money from numerous lenders. Donor crowdfunding is another option to consider as it allows entrepreneurs to raise donations to support their business goals. 

When the crowdfunding process is successful, it can result in an influx of startup funding to support a small business’ goals. However, results can vary and many entrepreneurs find that crowdfunding campaigns fall short of reaching their funding needs.

7. Venture capital

You may be able to get funding from investors for your startup in the form of venture capital investments. With venture capital, you give up partial ownership in your business in exchange for investments. 

Venture capitalists take on a lot of risk. There’s a chance these investors could lose all of their money if a new business venture doesn’t succeed. As a result, most venture capitalists typically focus on working with companies that display high-growth potential. 

As mentioned, you typically need to be prepared to offer partial ownership in your company in exchange for venture capital investments. You might also have to agree to allow investors to play an active management role as well, or at least have a seat on the board of directors. By taking a more active role in the startups in which they invest, venture capitalists often aim to improve their chances of success. 

8. Startup accelerators

A startup accelerator is a small business mentoring program that has the goal of accelerating the growth of your new business venture. Typically, you must apply to be accepted into a startup accelerator, and you’ll need more than a good business idea to qualify. Many startup accelerators require startups to have an actual product (or at least a prototype) ready to produce and promote. 

If a startup accelerator program approves your application, it will typically require you to sign over a percentage of equity in your company (often 5% to 10%) to secure a spot in the training program. Should the accelerator help you find other investors, you may have to surrender additional equity to secure more startup capital in the future.  

9. Small business grants

Small business grants represent another unique and appealing way for startups to seek funding. Unlike business loans and other types of financing, you do not have to repay grants, nor does this type of funding feature the added expense of interest or fees. 

On the other hand, competition tends to be high for small business grants. Therefore, you should be prepared to conduct research and often submit numerous grant applications if you hope to use this strategy to fund your new business venture. 

Even if you apply for dozens of grants, there’s no guarantee that you’ll receive the funding you seek. But it doesn’t hurt to try as long as the process doesn’t become so time-consuming that it keeps you from completing other important tasks in your startup business journey.

10. Personal savings and credit

Many small business owners rely on personal savings or personal credit to fund their startup business ventures. The SCORE Foundation (powered by the SBA) says that 78% of startups receive capital from personal savings or income from another job. MasterCard® research also shows that 46% of small businesses use personal credit cards. 

It’s important to understand that using personal funds or credit to invest in your own startup carries significant risks. For example, some entrepreneurs might withdraw funds from savings or retirement accounts to launch a new business venture. Yet before you consider taking such a big risk, it’s important to consider what would happen if the new business failed and make sure that possibility is something you could survive. 

11. Family and friends

Some small business owners have the privilege of being able to turn to family and friends for support of their new business ventures. And whether your loved one wants to get involved as an investor, a lender, or a donor, receiving a helping hand from someone close to you can mean the world when you’re working hard to turn your business dreams into reality. 

According to NorthOne, around 10% of small business owners used funds from friends or family in 2021. Yet before you accept loans, investments, or donations from loved ones, it’s important to consider the potential hidden cost. 

Even the best-made business plans do not always succeed. If your startup fails and you’re unable to repay your loved one (or if their investment turns into a bad one), that loan or investment could become a financial loss for your friend or family member and damage important relationships. So, before you accept any startup funding from loved ones, it’s important to put all of the loan or investment terms in writing and have an honest conversation about the risks involved.

Next steps

There are many different ways to get startup capital for your business without a traditional bank loan. So take the time to review your options and figure out which ones work the best for you. If you decide to borrow money for your startup, it’s also wise to compare multiple financing options to make sure you find the best deals available for your situation. 

As a responsible business owner, it’s also important to understand how much financial assistance you need and can afford to repay. Before you apply for any financing you should have a plan in place to pay back the money you borrow without putting yourself or your new business under financial strain.