Being an entrepreneur was tough before the pandemic. Nearly two years in, it’s proven to be nearly impossible to access traditional forms of funding needed to sustain a business through this kind of cultural and economic turmoil. And, the numbers show just how tough it’s been.
Four in 10 small business owners report they’ll need to rely on no-cost grants or zero interest loans this year to keep their business open. Those numbers are even higher for businesses owned by people of color. 58% of Black-owned businesses, 53% of Latino-owned businesses and 51% of AAPI-owned businesses are saying they’ll need to rely on no-cost grants or zero interest loans to help pull them through into 2022.
This is where Wealth Stack comes in. We’ve been doing a lot of our own research, too, and talking to small business owners in need. We’ve found that aside from attracting and retaining top talent during the Great Recession, they also need help accessing alternative sources of capital.
Here’s what to know about your options heading into 2022 and where you can find the right kind of capital to catapult you into success (or at least into a space where you can breathe just a bit easier).
Why is it So Hard to Access Capital as an Entrepreneur?
Want to know the number one reason why startups fail? Year after year statistics show that the number one reason why is due to running out of money or a lack of access to more funding.
Why does it have to be that hard, though? For starters, the process of accessing traditional sources of capital is pretty outdated. There is a lack of linearity in the fundraising process and that, coupled with rejection after rejection, leaves most new entrepreneurs in the dark as to how to proceed. Because, you have to remember, that on top of looking for funding and pitching their company to investors, they’re most often wearing a dozen other hats as well.
And, finally, we’ve also personally heard from quite a few small business owners that one of the reasons why it’s so hard to fundraise or search for investors is because there is often a minimum revenue size that you have to meet before you can start to access large amounts of capital.
While some institutions offer loans to businesses with annual revenues as low as $20,000, it’s quite rare to find a good loan offer if your business earns under $500,000 annually. This is actually part of the reason why we created the Wealth Stack Growth Pack. We’re all about connecting eager startup founders and small business owners with the cash they need to grow their company. However, it’s nice to learn about what alternative sources of cpaital even look like so that you can rest assured knowing that you’re in good hands with Wealth Stack. Let’s walk you through some of the most common ways that entrepreneurs access alternative sources of capital.
MRR loans, or lines of credit, refer to “monthly recurring revenue” lines of credit. With this type of loan, the financial institution lends money to you based on the amount of monthly recurring revenue your business earns. Basically, a financial institution looks at your recurring revenue and lends you a percentage of that, using the future revenue as collateral.
Unlike mortgage loans, which are very standardized, these types of loans mean that every lender has their own particular formula for how much they can take out based on their revenue. This means that these lines of credit are often a bit more personalized.
However, it’s important to note that you obviously need to have recurring revenue in order to access this type of funding. Businesses with subscription models (such as SaaS businesses, for example) are often a great fit for this type of alternative capital.
Accessing Capital Through Private Credit
Private credit is an asset class of privately negotiated loans and other forms of debt financing from non-bank lenders. They can include things such as small business loans, venture debt, and consumer loans.
Why would a small business owner look to raise capital via private credit? It’s often one of the only options for small and new businesses who can’t access public credit markets. This is because private credit lenders and investors provide access to the cash in exchange for the full amount returned plus interest.
For investors investing in this type of asset, it’s beneficial to them as well because private credit contracts tend to be a lot shorter than other investment types. Businesses with lots of potential but little traction to show due to a lack of funding can turn around and pay off the loan quickly with little to no risk that other investments like stocks and real estate involve.
How to Borrow Money from a Private Debt Fund
Borrowing money through a private credit fund is often quite a lot easier than most small business owners think. You’ve probably already Googled something like “private debt fund” or “how to access money from a private credit fund.” The results are numerous and, often, quite hard to understand.
Basically, investors have the choice of investing in venture debt financing or private debt funds. Venture debt financing is offered to companies who already have venture capital backing (hence the name) and investors are often given common equity instead of returned cash. So, make sure that you know which one is right for your small business.
How do you borrow money from a private debt fund? You have to do your research on the various different lenders out there depending on where you live and what your business model, size, and revenue is. Usually, this requires a lot of independent research or access to a financial planner with experience in funding.
How to Borrow Money from an SBIC Fund
Another option is to apply to access capital via the SBA’s SBIC program. SBIC stands for Small Business Investment Company, and the fund is a privately owned and managed investment fund that's licensed and regulated by the SBA. This is often a much faster and easier route than applying to borrow money from a private debt fund, simply because the process is done through the Small Business Administration.
On top of that, there are other perks, such as:
- The rapid deployment of funds from the SBA, leaving you with more time to build your business instead of look for investors
- Flexible terms for both long-term and short-term investments
- Exemption from SEC registration
- Enhanced return potentials
How do you apply for this program? You visit this site.
We will note, though, that to be successful with your application, it’s important to be able to show that you can generate enough revenue to pay your debt back on time. The SBA notes that, “This is particularly important for Standard Debenture and Impact SBIC applicants. Early Stage applicants should demonstrate multiple full, positive exits within four to six years of the investment date.”
How to Borrow Money from a Mezzanine Lender Fund
Investopedia provides a pretty concise definition of mezzanine loans as “a combination of debt and equity finance [that are usually used] in the expansion of established companies rather than as start-up or early-phase financing.”
The pros of these types of business loans include the fact that they require minimal collateral from the business in order to disperse the funds. However, interest rates for these loans tend to hover between 20-30%, which isn’t ideal for new small businesses or those that are already struggling to make ends meet. This is why most companies only take out these types of loans in order to finance a specific growth project or for acquisition purposes.
Accessing money to borrow from a mezzanine fund is similar to accessing money via a private debt fund. You simply have to look around online for advisory firms or non-traditional lenders who already have established mezzanine funds with investors investing in them.
Wealth Stack: Your Solution for Success
There are definitely more options these days when it comes to funding your small business. That is, in part, due to the fact that we have the internet to rely on to help us on our search for capital and other forms of alternative funding.
However, as you can see from the details we’ve listed above, accessing capital from places like a mezzanine fund or private debt fund actually aren’t at all that easy. You still have to do your research and contact the firms separately to get more details, apply, and complete the entire process.
We’re here to make that process a whole lot easier.
At Wealth Stack, we offer digital financial advisory services via the Wealth Stack platform that facilitates access to alternative sources of capital.
However, more than that, we offer access to the funding you need at the terms you want. We also guide you through the process of using that capital wisely. Our in-house financial experts will teach you how to use that cash to actually increase the value of your business.
The chance to access the funding that’ll help you build while also getting guidance on how to use it to scale more effectively and efficiently? Sounds like a win-win to us (and that’s because it is). Get in touch to start the process of becoming part of the Wealth Stack Growth Pack.