How Obtaining Business Funding has Evolved over the Past Decade
In addition to a great concept and solid plan, funding is a prerequisite for starting a successful small business. Securing enough capital to launch your company and stay solvent during startup is essential.
A decade ago, many small business owners would head to the bank to obtain funding, but times have changed. Today, the traditional banking scenario may not be the first choice for business owners seeking financing.
Traditional small business loans decreased since 2008
According to the Small Business Association (SBA), the amount of small business loan originations fell by more than one-half during the 2008 financial crisis. By January 2018, loan originations were still down by 40 percent from pre-crisis. The decline was more pronounced at large banks. The Pepperdine Private Capital Access Index Second Quarter 2019 report shows that only 41 percent of companies had secured financing from a bank business loan in the prior three-month period.
The decrease in funding statistics isn’t due to fewer small businesses. There are more companies today than a decade ago. For instance, in 2019 there were 30.7 million small businesses compared to 27.3 million in 2008.
What types of funding exist now that didn’t exist in 2010?
Over the last decade since 2010, funding has evolved. Today, you’ll find more avenues than ever to secure the necessary funds to become your own boss. Thanks to Fintech, funding options exist today that weren’t around in 2010.
Alternative funding options today include microloans from nontraditional online financial services companies. You can also fund a startup with cryptocurrency. The option to crowdsource funds with a wide variety of investors is another new phenomenon. Online lenders like Lendio, FundBox, and Kabbage have proliferated over the last decade.
Most common sources of funding in 2010
In 2010, the types of funding often used to start a business consisted of time-tested methods, such as securing loans and credit lines from traditional banks. This included SBA loans, which are backed by banks. Other common ways of funding a business in 2010 were securing seed money from angel investors, venture capitalists, and family and friends. When it came to alternative funding, the only common type back in 2010 was factoring.
In addition to being shorter than today, the list of funding sources in 2010 was much less dynamic. Small business funding options a decade ago tended to lean heavily on an entrepreneur’s financial and credit standing and ability to repay. That meant the business concept often took the back burner. Today’s funding options, such as crowdfunding, rely heavily on the popularity and viability of the small business owner’s idea.
(JOBS) Act increased alternative funding options
A sweeping policy change in 2012 jumpstarted the rise in alternative sources of financing for small businesses. The Jumpstart Our Business Startups (JOBS) Act signed into law on April 5, 2012, was intended to help small businesses raise funds in public capital markets by lessening regulatory requirements in accessing capital.
“The JOBS Act of 2012 and resulting crowdfunding became a game-changer,” says White. “For the first time, fledgling business owners could go directly to the public to raise funds rather than take the route of traditional loans, VCs or angel investors. The Act opened a centralized mode of communication to reach a pool of investors. It’s also a form of funding that doesn’t require that business owners give up equity.”
Prior to the JOBS Act, alternative avenues for business fundraising, such as crowdfunding platforms, were illegal, notes Calloway Cook, president of Illuminate Labs Inc., a supplement maker. Today it’s possible to fund a startup or new product with the help of crowdfunding platforms such as Indiegogo and Kickstarter or crowdfund loans from companies like LendingClub.
“The JOBS Act was passed in 2012, but the proliferation of equity crowdfunding sites didn't truly pick up until several years after [in part due to SEC regulations],” says Cook. “The great thing about equity crowdfunding is it makes entrepreneurship more of a meritocracy. Even if you don't have a powerful network to reach out to for business funding, you can raise money from the strength of your idea.”
Fintech and the changing face of funding small business
The increase in alternative sources of funding over the last decade directly correlates with a rise in the use of technology and its capabilities and resulting reach. Small businesses without collateral or a solid credit history that would have been turned down for funding a decade ago can now harness the power of technology to seek capital.
“The financial technology ecosystem has completely changed the way we handle money and invest our wealth,” says Jim White, Ph.D., who runs several businesses, including Post Harvest Technologies, Inc., Growers Ice Company, Inc., and PHT Opportunity Fund LP. “Fintech has given us blockchain and cryptocurrency, robotic financial advising and apps for everything, including mobile payments, stock trading, and budgeting,” says White. “Fintech has also revolutionized the lending arena to make it transparent. It’s a whole new world.”
The owners of a small bakery, for instance, can crowdfund for startup funds or use cryptocurrency to get up and running. Similarly, a young up-and-coming app developer can reach out to one of the many financial companies offering microloans and secure $50,000 to fund app development.
Nowadays, big banks and savings and loans aren’t the only players offering business owners financial assistance. Payment system platforms such as PayPal and Square Capital now offer entrepreneurs microloans. Amazon has business loans today, and even Facebook has started funding small businesses. These options are sources of capital that weren’t a part of the 2010 funding landscape.
The incidence of obtaining funding from online business loan lenders, rather than banks, is also steadily rising. In 2018, according to American Banker, 32 percent of small businesses sought online loans, up from 19 percent in 2016.
Securing funding easier than a decade ago
“There's more private equity now than ever, and it's easier for startups to get funded now than in the previous decade,” says Cook. “An indirect result of wealth concentration to the 1 percent and 0.1 percent is that there is more capital available for risky ventures. A person who worked for a modest salary until retirement isn't going to invest their $2 million net worth at the age of 65 into a biotech startup, but an individual with a $60 million net worth would consider it. The risk/reward makes more sense the higher your net worth.”
Alex Capozzolo, co-founder of Brotherly Love Real Estate, which flips houses, agrees. “Raising money is much easier than it was 10 years ago because of the available technology and its capabilities,” he says. “Fund seekers leverage technology more often now to raise money. It's much simpler to find investors and connect with them.”
Cappozzolo sites real estate specific platforms available today for crowdsourcing in his industry. “Sites like Fundrise enable real estate entrepreneurs to crowdsource money to purchase large properties,” he says. “Even the way we communicate with investors during and throughout projects has changed because of technology. For example, virtual walk-throughs are now possible.”
Transparency and immediacy are more common in today’s funding environment than a decade ago. Thanks to online exchanges and transactions, it’s possible to get an answer to a funding question in hours rather than weeks. If you put up a funding page for your business idea on a crowdfunding site, for instance, you could receive pledges for capital within minutes.
Bootstrapping still common and successful
If you’re unable to find funding for your business, bootstrapping is still a tried-and-true method that’s as common today as it was a decade ago. Bryan Clayton is the CEO of GreenPal, which he describes as the Uber for lawn care. His company failed to get angel investors and venture capitalists interested in the business concept when he and his co-founders started the company two years ago.
“Entrepreneurs like myself have turned to debt to get started, and luckily for us, it worked out,” says Clayton. “Debt can magnify mistakes, but when used wisely, it can be a powerful fulcrum.”
Clayton and his cofounders started GreenPal with an unsecured line of credit for $85,000 two years ago. “That funding got our business started, even with no collateral,” he says. “We paid that off the first year. This year we’re going to surpass $13 million in annual revenue. Fortunately, the investors we approached early on told us no. If we’d received their capital, they would have owned and controlled 30 percent of our business. Instead, we’re self-funded, and my cofounders and I own it all.”
A good business model always essential
No matter how you decide to fund your company, a good business concept and plan is vital to business and funding success, says White. “Business owners still need an excellent product, great vision, and a credible business plan to gain traction for any funding option.”
When you apply for funding for your business, lenders will ask for documentation that proves you’ve started an official company. Before you seek funding, make sure to get help filing the necessary paperwork at Swyft Filings.
Written by: Julie Bawden-Davis
Julie Bawden-Davis is a widely published journalist, blogger and author, who specializes in writing about business and personal finance. Julie’s articles have appeared in a wide variety of publications. She regularly writes for American Express Business Trends & Insights and Parade.com. For 10 years, Julie wrote weekly columns for the Los Angeles Times. When she’s not writing, you can find Julie in her Southern California garden.