Updated: Jul 15, 2020
By Harrison Greenspan
As the COVID-19 pandemic continues on a trajectory that is unwavering and largely unknown, not only have business owners felt the effects of these trying times, but also those who are either planning on launching or are currently in the process of launching a small business have felt their anxiety rise as well.
While you may be swearing though your computer screen reading this by asking “Why would I [insert preferred choice of swear word here] launch a business NOW of all times?!,” remember that there are always two sides of the same coin. Thus, there are simply many reasons as to why you SHOULD be launching your business today, and the most ironically discouraging of reasons is funding.
Funding through Venture Capital
Venture capital is that form of private equity financing that is popular in the entrepreneurship world of Silicon Valley. Investors (also called venture capitalists in this situation) will look to fund startups and small businesses with high long-term growth potential (or have demonstrated high growth in terms of number of employees, annual revenue, or both) in exchange for equity (an ownership stake) in the respective company.
This is a popular form of financing because the money you receive from a venture capitalist is yours to keep and spend, which in turn helps your company grow quickly. Furthermore, the venture capitalist is typically a successful entrepreneur, so their connections with other businesspeople are no doubt valuable. As such, due to the fact that they will want your business to grow as much as you do since they have a stake in your business, they’ll not only connect you with other business leaders who can potentially help you grow your network, but also what we are all looking towards, the profit margin. Now, all of this sounds fine and dandy, but unfortunately, fiscal conservatism takes over the entrepreneurial mindset during an economic downturn such as a recession.
To get a general idea regarding the amount of funding potentially available during the current economic downturn, let us look at data of funding from the past two recessions. Starting with the investment of venture funds themselves, commitments by limited partners to venture funds dropped 41% from 2000 to 2001 and a whopping 58% from 2008 to 2009. Adding more discouraging evidence to the situation at hand, venture capitalists, in turn, slashed their investments in companies during the most recent recessions, investing 49% less in 2001 than they did in 2000 and 30% less than they did in 2008. And lastly, series A financing through venture capital firms saw similarly grim drops, specifically 37% from 2000 to 2001 and 27% from 2008 to 2009.
Now, you may be thinking that finding the necessary funding is nearly impossible by looking at the numbers of the last two recessions and the fact we’re basically in a worse one right now. For perspective, unemployment peaked at 5.5% in 2001, 10% in 2009, and an unsightly 23.9% as I’m writing this. However, there are many more ways to acquire the necessary funding to launch your business today! And surprisingly, some of the benefits of launching a small business today have come about because of the uncertainty of the pandemic. So, where do YOU and your respective small business plan go from here?
Funding through Banks & Loans
Small business loans from banks is a traditional means to acquiring necessary capital your new small business will need. Although banks are usually not going to give you all of that your heart and business desire (especially in comparison to the amount of funding coming from venture capitalists), it is nonetheless a start! And quite conveniently, we are seeing lower interest rates on many bank-backed business loans in the midst of the pandemic. In particular, the SBA small business loan is a great and versatile option backed by the Small Business Administration (SBA). The SBA is a federal government program that provides support to small business owners in the form of:
· Workshops through the SBA Learning Center;
· and Small Business Loans.
While the loans provide a government-backed guarantee on part of the loan and thus backed by the SBA, they don’t come directly from the SBA. Instead, SBA loans are made through banks, credit unions and other lenders who partner with the SBA, who in turn connects you with these lenders (typically local lenders).
In general, there are three main types of SBA small business loans:
· 7(a) Loan Program, which is the SBA’s primary program for providing assistance to small businesses. For more information such as how to qualify, please visit SBA7a.
· 504 Loan Program, which is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings and machinery, at below market rates. For more information, here is a 504 Loan Program Fact Sheet.
· 7(m) Microloan Program, which is a small (intermediary lenders provide small business borrowers with $500 to $50,000), short-term commercial loan originally created to help women, minorities and veterans acquire the startup funding they need, but now is intended to help any entrepreneur who may have trouble getting financing from other sources, such as banks or credit unions. For more information on how to acquire yours today, as well as other microloan options, please visit Fundera.
And if these loans weren’t already enticing, the SBA has announced that it will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020. What does this mean for you and your launch of a small business? If you qualify, apply for, and acquire one of these already relatively affordable loans, then the SBA will begin making payments for you as soon as the loan is disbursed to you and your small business, with the first payment due on the loan and will make six monthly payments.
And lastly, the Payment Protection Program (aka PPP), is a loan designed to incentivize small business owners to keep their workers on the payroll. As such, participating SBA-backed lenders (whom you can search for here) will forgive all loans if ALL employees are kept on the payroll for a period of at least 8 weeks. One of the only downsides to this loan is that if you haven’t launched your small business yet, you are out of luck regarding this particular loan, as it’s required that you’re operating as of February 15, 2020.
Some more highlights:
· All small businesses are eligible.
· At least 75% of the PPP loan must be used to fund payroll and employee benefits costs. The remaining 25% can be spent on mortgage interest payments, rent and lease payments, as well as utilities.
· The loan has a maturity rate of 2 years and an interest rate of 1%.
· No need to make loan payments for the first six months.
· No collateral or personal guarantees required.
· No fees.
· The loan covers expenses for eight weeks starting from the loan origination date.
· The loan can be forgiven and essentially turned into a non-taxable grant.
· You have until June 30, 2020 to submit an application, which you can find HERE!
Overall, there are numerous funding options by means of loans, especially those backed by the SBA. However, it is imperative to do your due diligence and apply ASAP, as many of these opportunities are limited!
· For Current SBA Loan Rates, click HERE!
· For more information on Coronavirus Relief Options (backed by the SBA), click HERE!
· And if you need a local assistance locator (backed by the SBA), click HERE!
Whether it’s because the more traditional means of funding does not provide you with the necessary funding to launch your business, or you simply do not meet the required qualifications to acquire such business loans, look no further than the beauty of people power. Crowdfunding is a method of funding particular projects or products by small amounts of money from a large number of people.
The crowdfunding model consists of three primary actors:
· The project initiator (which would be you), who proposes the project or idea to be funded;
· Individuals or groups who support the project or idea;
· And the moderating organization that provides a platform (almost always in the form of a website), which brings everyone together.
There are plenty of moderating platforms to choose from, but the more traditional donation-based crowdfunding platforms (or rather reward-based crowdfunding platforms) are IndieGoGo, Kickstarter, and GoFundMe. IndieGoGo is a crowdfunding platform that focuses on creative innovations of the technological world before it hits the mainstream (or retail). If you’re an innovator with a product in mind, whether it is still in development or already manufactured and ready to go, IndieGoGo is possibly the place for you. On the other hand, Kickstarter offers a crowdfunding platform that is simply there to “help bring creative projects to life,” whether it is in the realm of the arts, technology, food, fashion, or even publishing (e.g. literature, comics or even podcasting). So, while IndieGoGo is clearly more nuanced in the realm of technology, Kickstarter appeals to all types of projects and ideas.
GoFundMe is another option but focuses on fundraising for events opposed to actual products, ranging from life events such as celebrations and graduations to challenging circumstances like accidents and illnesses. Although GoFundMe may not seem to be relevant to your needs at the moment, keep it in mind for when that challenging circumstance shockingly disrupts your life and future plans, especially during the launch of your business. And unfortunately, this pandemic may be forcing you to consider this option now. Luckily, GoFundMe has set up a specifically crafted page for small businesses struggling during the pandemic, and you can find that landing page HERE!
Overall, these are all fantastic options if you are looking to presell a product or service to launch a business concept without incurring debt or sacrificing equity (or shares). However, there is another crowdfunding model called equity crowdfunding (or rather investment crowdfunding). Unlike in the donation model, individuals who fund become owners or shareholders, thus creating potential for financial return.
Most popular among the numerous equity crowdfunding platforms is AngelList, which not only allows individuals to research and invest in your small business, but also allows you to recruit new talent, whether it be a new software engineer or director of marketing. As such, those who are truly passionate about the small business and startup world visit this far-reaching ecosystem. Another equity crowdfunding platform is MicroVentures, which connects accredited investors with small businesses and startups. Although it does not provide the vast startup ecosystem that is seen on AngelList, MicroVentures is special as it allows for secondary trading, meaning you can buy shares in a business from other holders, such as employees.
If you would like to start building your crowdfunding profile and its respective campaign for your small business, be sure to check out the “9 Steps to Launching a Successful Crowdfunding Campaign” by Entrepreneur.
Funding through Business Lines of Credit
Characteristically described as a hybrid between a credit card and a traditional business loan, business lines of credit are a flexible source of finance for new small businesses. Essentially, a business line of credit is a pool of money established by the lender with a maximum credit limit.
One of the premier advantages of the business line of credit is the fact that you only pay interest on the amount you’ve used at any given time. This incredible benefit simply creates far-reaching flexibility. Other advantages include but are not limited to:
· Capital is available whenever you need it.
· Bad credit is typically acceptable.
· Builds your credit score.
While traditional banks offer the advantage of larger and longer-term options in comparison to online business lines of credit providers (who typically provide quick and streamlined applications), banks will also usually require more paperwork, and thus is a bit more tedious of an application process.
On April 2, 2020, Governor Gavin Newsom announced that small businesses in California will have an extra year to pay up to $50,000 in sales and use taxes to the state. This is great news, as the extension applies to small businesses with less than $5 million in taxable sales, who will be able to sign up for a 12-month, interest-free payment plan.
In the week prior, Newsom also signed an executive order extending the tax filing deadline until the end of July for businesses filing returns for less than $1 million. For more information regarding state taxes, please visit covid19.ca.gov.
As you can see, there are aplenty flexible options that will help fund the launch of your small business, even in the unforgiving circumstances created by the current pandemic. Do your due diligence by exploring all of your options, as you might be surprised to find advantageous offers you never knew existed. If you would like further guidance in launching your small business today, do not forget to visit Legalucy!
Are you interested in launching or sustaining a pandemic proof small business? Spot issues, take action, stay safe, and thrive in a post Covid-19 world with Legalucy. Learn more at thelucyreport.com
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