We’re living in somewhat unusual times. It’s a time when interest rates are low, at least if you ask Central Bankers and academics. But at the same time credit and savings are scarce. And when you think about it, that doesn’t make a lot of sense. How can interest rates be low and credit for startups be scarce at the same time?
Well, one reason is that banks are keeping all their cash locked up at central banks. The Federal Reserve right now has trillions of dollars of banks’ money on its balance sheet. And it’s paying them a small amount of interest every month for them to keep it there.
If you’re somebody looking to start your own business, that should immediately send alarm bells ringing. Here we have a central bank claiming on the one hand that it wants to keep the banks lending while paying them to keep their cash all locked up. Whatever the motivations of the central bankers, this isn’t good news for small businesses. Banks have traditionally been the institutions that lent out the money. But now they’re not doing their job essentially because the central bank schemes mean they no longer have to risk their money in the market.
So what can entrepreneurs do right now to get hold of some much-needed cash? Let’s find out.
Right now, real savings in the economy are at rock bottom. People just don’t want to save their money, especially in cash, when interest rates are near zero. But that doesn’t mean that they don’t want to preserve their wealth full stop. They do.
This is where angel investors come in. These are people who want to preserve their wealth through investing in sound business ideas. Usually, they will want a stake in the company in return for their money. And this may mean that you have to give up a degree of control.
But that may actually work out to your advantage. Why? Well, it’s often the case that Angel investors are people who have already had a lot of success in your particular industry. In fact, many angel investors quit their regular job looking for new business opportunities. They know about the intricacies of the sector. And they’ll be able to offer guidance and advice on what will likely work and what won’t.
Traditionally the biggest problem was finding angel investors. But thanks to the internet and social networking, they’re easier than ever to find. Now there are plenty of websites dotted all over the internet that can put you in contact with angel investors.
Of course, there is a lot of competition for angel investor funds. The typical angel investor will see between 15 and 20 candidates per month. It means that those pitching need to practice their pitches until they’re perfect. Angel investors have a lot of options, so you need to convince them that you’ve got an amazing, viable, project.
Typically angel investors will do between one and three deals per year, worth anywhere from $25,000 to $100,000.
Ever since the early days of the internet in the 1990s, people have been using it to buy and sell things. But it’s only recently that companies, like Kickstarter, recognized it could be a source of financing too.
Right from the beginning, Kickstarter was an undeniable success. It funded some of the most exciting video games, artists, and appeals. Many of which would never have attracted finance via the traditional means.
But what is so surprising is the size of the crowdfunding effort. Upcoming video games, like Star Citizen, have attracted funding of over $100 million. And that means that Kickstarter companies if they have an idea that people love, can attract as much capital as the biggest studios.
Having no gatekeepers is a significant advantage. The crowd literally pays for what it wants to be produced in the future, without intermediaries like banks and investors. But that doesn’t mean that success on Kickstarter is easy. Sites like www.heartrepreneur.com/success-and-failure-on-kickstarter/ do a good job of detailing some of the common issues.
The thing that generates the most success is having a great story. The company behind Star Citizen told a tale of how gamers could expect one of the richest open world experiences in gaming history. And gamers, desperate for such an experience, stumped up the money. The idea is to generate as much enthusiasm as possible for your product. And if you have a truly worthy idea, it should be enthusing.
Peer-to-peer loans are exactly what you might imagine. Just like the other examples we’ve looked out, traditional financial institutions are cut out of the loop. People lend directly to each other, usually over an internet platform of some description. It’s a little different to Kickstarter, in the sense that funding isn’t crowdsourced. You won’t be appealing to the masses. You’ll be pitching directly to a potential investor online.
Once you’ve sent your pitch, potential investors will have some time to review it. They will then decide whether to take on the investment or not. You pay the investor back through monthly loan installments, paid through the platform.
Right now in the US, peer-to-peer loans are booming. A study conducted by the Federal Reserve in Atlanta found that some 20 percent of businesses had borrowed that way in 2014. And that the approval rates on those loans were higher than for traditional banks.
What’s more, P2P lending is actually better than borrowing from the banks. Typically the loans are more flexible. And things like rates and fees are lower. As we go forward, and banks continue to hold on to their cash, we can expect the ever greater adoption of P2P lending.
One thing to remember, however, is that you’ll need a good credit score. Just like when you go for a loan at the bank, your credit score is what determines whether you’ll get a loan and what rate of interest you’ll pay. So it’s worth putting in a bit of effort to improving your credit score before you take out a loan.