Open the Bank!

You can always start your business using your credit cards, 401(K), or possibly some savings. If you don’t have enough after that, you can reach out to your family members. However, rather than just asking them to let you “borrow” some money, how about using a 3rd party program that structures and documents every loan so that your family and maybe friends want to give it to you.

This type of funding is called Angel Capital Investing.

Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund. Although typically reflecting the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc. The Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar tables evidence that angel-funded startup companies are less likely to fail than companies that rely on other forms of initial financing. Angel capital fills the gap in start-up financing between “friends and family”—(sometimes humorously given the acronym FFF, which stands for “friends, family and fools”) who provide seed funding—and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under US$1–2 million. Thus, angel investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but into more than 60 times as many companies (US$20.1 billion vs. $23.26 billion in the US in 2010, into 61,900 companies vs. 1,012 companies).

Peer to Peer Lending is just that! You get loans from people who are your peers. They are usually ordinary people who see that you are trustworthy, creditworthy, and have a great idea and want to help you get it started. They do this to receive a small profit on each venture they loan to.

Have you ever gone to a bank in desperate need and been turned down for a loan? Have you checked into a bank loan and realized that the combination of the loan and the excruciatingly high interest rate will put you further in the poorhouse? Are you tired of the government regulating how you pay back loans, because they seem to control your money coming and going? Then, you may be interested in learning about peer to peer lending.

When a bank turns you down or charges too much interest to justify a loan, you are pretty much stuck without any recourse. Fortunately, some financially savvy businesspeople got together and came up with the novel idea of peer to peer lending. Instead of going to a bank, struggling entrepreneurs, homeowners, people struggling under a mountain of credit debt, and virtually anyone who wants a financial backer to give them a boost, can apply for a peer loan.

Instead of going to a financial institute and repaying one lender, you can now go to a social lending site and ask for the amount of money you need and state the highest interest rate you are willing to pay. Other people that are signed up as lenders review your profile and can loan you a portion of the requested money.

The peer to peer lending sites match up you, the borrower, with one or a group of lenders that are willing to loan you the money at the rate of interest you’re offering to pay. Prospective lenders can review information about your credit and debt and decide whether they’re comfortable making a micro-loan to you. The social lending site facilitates transferring the money that is loaned to the borrower and the handling the payments back to the lenders. In return for offering the loan marketplace and facilitating the loans they charge some type of fee.

Today, the novel idea is really taking hold and is offering many people an alternative to loans from banks and other regulated financial institutions.

For several examples, check out the companies listed below:

• Prosper
• Zopa
• Kiva
• Lending Club
• Loanio

You can seek Venture Capital, however, unless you have a “one-of-a-kind” invention, a unique service or green technology with many patents; getting venture capital is very hard if you are a fledgling start-up company. It is not impossible, but in most cases they want a business who has shown that their product or service really works and that it is needed. Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which and usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital. In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership (and consequently value).

Micro loans are small business loans for up to $35,000. Micro loans are generally used for start-up cash but are sometimes given to newly launched small businesses for working capital. Micro loans can be used for many purposes including the purchase of equipment, inventory, machinery, fixtures, furniture, supplies, and even to purchase another business.

Micro loans obtained through SBA-backed or other related programs typically require the applicant to fulfill certain business training and planning requirements (which vary) before a business owner can submit an application for a micro loan.

Microcredit is the extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.

Microcredit is a financial innovation that is generally considered to have originated with the Grameen Bank in Bangladesh. In that country, it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty.

Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility[citation needed] in the mainstream finance industry, and many traditional large finance organizations are contemplating microcredit projects as a source of future growth, even though almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun.