The pandemic has made accessing capital a challenge for entrepreneurs.
It’s already a problematic prospect to find investors for a startup. With the global pandemic hitting the world’s economies, venture capital firms are spending a lot of time vetting the viability of their current and future investments. The New York Times mentions that while startups were bracing for the worst, the worst never happened. What’s more, as the economy continues to tank, it’s the massive corporations that have the most to lose. This tendency of smaller businesses to be resilient suggests that this is the best time to register a business. However, after it’s registered, financing the company is another thing you must consider. In this article, we’ll look at the best ways to fund your business during the coronavirus pandemic.
1. Angel investors
An “angel” investor is anyone who invests their own money in an entrepreneurial company. For an angel investor to think that your company is worth investing in, they need to be clear on what you intend to do and how you intend to do it. There are even angel investors that wish to remain anonymous, passing their donations through cleverly set up LLCs in Wyoming or Florida. The motivation for these investors isn’t profit, but the opportunity to see new technology grow, thrive and replace old ways of doing things. These investors aren’t looking at how profitable your business is likely to be, only that it challenges the existing status quo.
Angel investors top this list because, despite the economic slowdown worldwide, they are still investing in emerging technology and new businesses throughout the world. Since they’re not motivated by profit, Angel investors don’t have to worry about making money from their investment. Research shows that more than half of British angel investors made new investments during the early months of the pandemic. For new companies that are looking to supplant old ways of doing things, angel investors are possibly their best bet for a solid financial footing.
2. Crowdfunding sites
If you’ve got a great idea that other people have already told you seems like something big, you might want to look at a crowdfunding solution. According to Business News Daily, crowdfunding is when a group of people pools their funds together to support an entrepreneurial enterprise. The most typical crowdfunding examples you’ll find are companies producing goods and services that rely on an established fan base. People who are already invested in an enterprise are more likely to put money into crowdfunding. But they aren’t the only ones. Game development companies and musicians tend to rely on crowdfunding for covering costs.
Crowdfunding has the benefit of connecting to your core audience immediately. What’s more, as each of these investors sees the passion in the business themselves, they’d be eager to share the business’s products with their social group. Several crowdfunding sites are dedicated to providing this service to businesses, complete with community management, and update tools. A compelling story helps new potential funding sources connect with your company. While there is less funding to go around, many people are still willing to back projects they identify with. Your business might be just what they’re looking for.
3. Small business credit cards
Credit cards can be a source of funding for smaller businesses. Sole proprietorships and single-member LLCs are most likely to benefit from this funding source, but there are caveats to be aware of. Small business credit cards might rely on the strength of the business owner’s personal credit score. Defaults or late payments would, in this regard, impact your personal credit score as opposed to the business’s. Unpaid interest can be too high, with some credit cards going up to as much as 20% on overdue credit. Just like personal credit, getting sunk into credit card debt will cost you in the long run.
You can get these credit cards issued from an online application without any added hassle of going into the bank. However, several smaller companies give credit cards that don’t require a personal guarantee. The downside of going with these companies is that the economy’s uncertainty may prove to be too much for smaller financial institutions. While the interest rates and personal guarantee requirement from large banks might be oppressive, they are a better choice for the security they bring.
4. Venture capital firms
Venture capital (VC) firms are concerned about funding the best, most innovative products with a lot of potential for growth and earnings. VC firms are motivated by profit, so if you’re looking for a company that’s willing to fund a potentially high-earning idea, these are your best bet. The problem is that because of their profit-focused approach, the business may struggle to retain its passion. VC firms also demand a lot of transparency in your business dealings, but it helps that there’s accountability built into the system.
What’s more, the COVID-19 pandemic seems to have avoided these firms altogether. VCs have stated that the pandemic hasn’t affected their portfolios much at all, and most of them are seeing significant growth. This influx of money means that VC firms may likely have many funds to invest in the coming months. If you’re looking for funding for an idea, it might not be such a bad deal to pitch a venture capitalist firm. If they deem your idea worth funding, you’ll be set up until the launch, at the very least.
5. Small business loans
Established businesses have the benefit of accessing state and federal aid packages to help them weather the pandemic. However, a new business needs to approach banks if they are to get the funding they need to establish themselves. Banks are seeing a downturn in the economy happening and aren’t looking at giving loans to individuals. Businesses might have a better time securing financing from these banks since they have the potential for earnings. Depending on how the bank views your proposal and your unique value proposition, they may be inclined to fund your enterprise.
Credit risk scores are already a concern among bankers. Banks have adopted real-time analytics engines to help them with risk determination in a post-COVID environment. There’s no telling at this point how massive the impact on the economy will be. Still, many economists estimate it to be quite large. For banks, new businesses may prove to be the way out of this economic slump, especially if their established payments are being interrupted by complications from the pandemic.
COVID-19 has forced us to realize that the world around us is more fragile than we’d like to believe. Many of the things we take for granted have been put into stark relief, from supply chains to employment. Once the realm of people who have the money and the time to spend, new businesses are now looking like a savior for talented individuals. If their skill and passion can help them to make a difference in the world, the only thing they need to see it through is funding. These funding methods are far from foolproof, but with the right approach, you can probably get enough financing to make your dream a reality.