Sourcing the right funding for your business has always been a challenge but in a world rocked by Covid-19, navigating the landscape is a whole new frontier. For companies that were planning to raise venture capital, the landscape has changed. VCs investment volume typically declines during recessions as VCs want to extend the investment period of their current fund so that they are poised to raise capital after the market has improved. While they're waiting it out, business owners may need to seek alternative forms of capital.
As both a venture capitalist and co-founder of Chelsea Capital, I've come to realize that there are numerous financing options that most founders don't know about. To help you find funding to fuel your business' increased demand or to simply make it through this tough time, here's a guide of what to expect of five funding options while weathering this uncertain environment.
The first step in finding your ideal financing solutions is to consider how quickly you need funding and if you're willing to give up equity in your company. Debt financing comes in a variety of different structures but the basis is that it's a loan to be repaid with interest over time where equity funding provides capital in exchange for a percentage of ownership of your company. Ultimately, the best option will depend heavily on your current financial situation and how quickly you need funding.
1. Venture Capital
While founders seem to view venture capital as the default capital source, it's not ideal for most businesses. To attract venture capital investors your business has to have very high growth potential, an enormous addressable market, and a significant amount of capital to fund that growth.
If your company is a fit for VC, be prepared to spend a good bit of time finding a partner. Since you'll be giving up partial ownership of your business, you want to make sure you find a partner who shares your vision and that your interests are aligned. While getting VC backing can typically take six months, in recessions VCs tend to invest less capital lengthening the process. And if your company isn't one of the very top performing startups in the market during a recession, you may need to look elsewhere for financing.
2. Friends and Family
Going to friends and family for funding to grow your business is the most common way to finance a young company. As with venture capital, you exchange a percentage of ownership for funding but with the risk of tarnishing your close relationship. With the stock market plummeting and unemployment rate increasing, however, it's likely to be a difficult time to raise from the people in your life.
3. SBA (Small Business Administration) Loans
These have always been attractive because of their low rates, but they require good credit and plenty of patience for the lengthy application process, which can take approximately two to three months. With the passing of the Cares Act, the recent $2 trillion government stimulus package, a new business Paycheck Protection Program was created, via a $349 billion lending facility modeled on the SBA's existing 7(a) program. The forgivable loans are focused on helping small businesses retain employees and cover payroll expenses.
4. Traditional Term Loans
This is a great low-cost option for mature and profitable businesses with great credit but unfortunately most small businesses don't meet all of the necessary criteria. In addition to the high qualification standards, the terms may require your personal assets to be used as collateral.
5. Alternative Financing
This includes a variety of financial structures to provide growth capital to revenue-generating companies without giving up any equity. These options are designed to deploy capital very quickly and offer more flexibility than traditional financing options. While the rates are higher, the availability, speed, and non-dilutive aspects can be appealing to founders. Here are a few alternative financing options, but there are many different types of deal structures crafted specifically for the type of business: