How do I raise money without going to a bank?
May 29, 2012 12:48 PM   Subscribe

How do I raise money without going to a bank? If I wanted to raise say a million dollars to extend my business and the bank is not being helpful. What are my options? I hear a bunch about P2P lending but how does that work and how do I access it?
posted by monkeywithhat to Work & Money (15 answers total) 8 users marked this as a favorite
Is this something that kickstarter could help you with?
posted by hermitosis at 12:57 PM on May 29, 2012

Response by poster: Excellent question. Kickstarter doesn't do big projects. The largest successful I have seen is 150k and they are mainly for sexy projects such as the next generation airplane. What if we want money to do something like extend my wife's yoga studio?
posted by monkeywithhat at 1:02 PM on May 29, 2012

If you actually have a need to borrow something on the scale of a million dollars, you already know how to do that. If you don't know how, you almost certainly don't need to.

Here's the thing: at the $1 million mark, we're starting to talk about investments as much as we are loans. Companies do borrow money, but when they're looking to expand their business they frequently look for investors more than creditors. So instead of taking out a $1 million loan, they sell $1 million worth of stock. The new shareholder then gets to participate in the profits of the company. The investor won't recover the principal of the loan until he sells his stake, but he'll get dividend payments as the company earns a profit. The investor thus bears more risk but stands to make significantly more, and over a longer term, than if he simply extended a loan. A company big enough to take out a $1 million loan is going to need at least that much in assets as collateral, but a smaller company may well be able to find an investor willing to pony up $1 million if the business plan is sound.

Companies particularly look for investors when they can't get credit. Investment is a riskier business than lending, and there are plenty of investors willing to take a risk on buying a stake in a company that no commercial bank would touch. Commercial lending is supposed to be a relatively low-risk proposition. Investing permits a much wider range of risk and reward.

How do you connect with potential investors? Check our your local SCORE chapter. There are people out there who actively invest in small businesses.
posted by valkyryn at 1:02 PM on May 29, 2012 [3 favorites]

Why is the bank turning you down?

You may find this thread on funding a yoga studio helpful. Short answer, same as pretty much every business: fund as much as you can yourself, then go to friends & family.

FWIW, do you have solid answers to these questions...

- Why do you need $1 million? It's a yoga studio, which is a cash-flow service business (e.g. no real inventory, not much capital investment needed beyond rent).
- How long will it take you to pay back some multiple of $1 million (any institutional investor is going to want a multiple of their investment, not just investment + interest)? Yoga studios are not very high margin.
- Why invest in your yoga studio? What's keeping you competitive?
posted by mkultra at 1:09 PM on May 29, 2012 [1 favorite]

When you say "the bank," have you exhausted all banks? I just heard this npr story about a tool for rating banks according to how many small business loans they give. They say smaller local banks tend to be better for this sort of thing. If there are banks in your community you haven't tried yet, that might be your next step.
posted by juliapangolin at 1:10 PM on May 29, 2012

the bank is not being helpful

What do you mean the bank? Talk to a bunch of banks.

There are also non-bank small business lenders like CIT or First Capital that lend against real assets or receivables. A million is too small for those two firms but there are smaller outfits around.

Try the SBA website too.
posted by mullacc at 1:17 PM on May 29, 2012

I've worked for a couple startups, and one of my closest friends is an entrepeneur who has raised 10's of millions for his projects. So, with that experience under my belt, I'm noticing this HUGE difference between the funded startups I've seen, and this Ask-Mefi question:

You haven't mentioned word-one about your business plan.

No one on earth (of a sound mind) would loan you money until you have a solid business plan built up. They will then perform "due diligence" - check out if you're legit, if your idea is feasible, and if you have the experience to pull it off.

One million dollars is approximately one million times harder to get than a buck on Kickstarter, and requires a similar increase in effort to make the request successful.
posted by IAmBroom at 1:31 PM on May 29, 2012

"Excellent question. Kickstarter doesn't do big projects. The largest successful I have seen is 150k and they are mainly for sexy projects such as the next generation airplane."

This isn't true. The Pebble Watch made $10.2 million dollars, Double Fine Adventures made $3.3 million, and The Order Of The Stick Reprint made $1.25 million.
posted by Jairus at 1:31 PM on May 29, 2012 [3 favorites]

Unless you're already a large multimillion dollar business, raising a million bucks is going to be a lot closer to finding investors than simply getting a loan. Whether through a bank, rich uncle, venture capitalist, or fans on Kickstarter, you'll have to demonstrate that the extra money will allow your business to grow and will give you the ability make many times more than the initial investment.

In other words, for the yoga studio example, you'd have to demonstrate that a million dollars will pay for this kind of expansion to the studio (here are estimates from builders and architects), which the zoning board will approve (here's a lawyer who says so), which I'll furnish for this much (see these estimates), which will allow me to offer X additional classes a week (here's a proposed class schedule), which will bring in Y new participants at Z occupancy percentage (here's the data from the studio now which shows long waiting lists for existing classes, surveys of existing customers saying they would pay more for the new services, market research showing your area has a dearth of yoga studio capacity per capita, etc...), which would bring in $A in revenue (here's our fee schedule and accounts receivable data), less $B in expenses (here's our current budget and here's a model budget with the expansion costs included), less $C in debt service (if you're taking out a loan), which leaves $D in additional monthly profit from the expansion.

Investors and lenders are going to want to see all that before they even start to consider giving you money. Then they will want to start picking apart your plan to find its weaknesses and risks (and you should know where those are and be prepared to explain them). What happens if you only get half as many new customers as projected? What if your labor costs increase because all the good yoga teachers are in demand? Why won't customers start joining the gym down the block which has yoga and a full fitness center and how will you encourage they to stay? If the new studio space doesn't get used as much as you predict, how easily could the space be re-purposed to generate more revenue? Will the lack of parking turn away your customers? You get the picture...

Naturally, investors and lenders come in many types, so you'd need to find people who specialize in the type of business and size of investment you're looking for. A dot com venture capitalist isn't going to give you the time of day unless his investment has a chance of doubling his money many times over, while a bank might be very interested in a local business that needs short-term financing that can be wholly secured against real property. Someone who regularly invests in fitness centers will be very familiar with all the numbers, and so they'll be looking at your proposal and comparing it to past investments to find all the weak points.

More generally, small business advice groups and services are a good starting point. Any investor or lender is going to want to see certain things from you in terms of a business plan and other documents, and these groups can help you get that all organized and help you practice your pitch. We're talking about organizations like SCORE, the SBA and other local groups here.
posted by zachlipton at 2:01 PM on May 29, 2012 [1 favorite]

I hear a bunch about P2P lending but how does that work and how do I access it?

P2P lending generally involves personal loans amounts less than $20,000 or so and are based on the idea that the borrower's personal income will pay off the loan. Lending hundreds of thousands of dollars to a business would involve a lot of complications that are generally not taken into account on P2P lending sites. As others have said you are looking more for investors than a loan in terms of what is feasible today for raising that kind of money.
posted by burnmp3s at 2:19 PM on May 29, 2012

Best answer: What if we want money to do something like extend my wife's yoga studio?

One thing that comes up a lot with people trying to raise money for things is people not understanding that people don't generally loan money without some sort of collateral being put up to secure the loan, unless its at punishingly high rates of interests (like a credit card). Want to borrow $100m to buy a $120m airplane for your airline? Sure. Want to borrow $100m to buy advertising slots for your airline? No way. No one will do this.

The net result of this is that people see the bank as a source of financing for business and business expansion, but except in very limited cases (say, your business needs the money to buy hard, durable assets that can be easily valued and resold, or you have large amounts of other collateral with which to secure loans like HELOCs and so on), this is simply not what banks do.

Banks don't have a staff that sits there and reads business plans and says, "Hey...a social network for college students, you know…this could be huge someday! We're in for a million bucks." This is why when you read news stories about Facebook IPOs and so on, they never say, "Oh and Commercial Bank XYZ made $200m on the deal."

Your neighborhood bank, for the most part, takes deposits, holds savings & checking accounts, and then makes loans against real estate, which it then resells to investment banks, who securitize them and sell them to China or other people with excesses of dollars who need them recycled into dollar-denominated assets with better returns than Treasurys (e.g. petrostates). That is mostly what a small bank does.

This is pretty easy to see in normal life: you buy a house, you can get a pretty low interest rate, especially if you keep the total amount of the loan under 80% of the value of the house. Why? Because the bank knows that if you stop paying, they can take the house, sell it, and get their money back. They'll still be out all their time and trouble, and they take the market risk of the house losing value in the meantime (or you destroying it), but it's relatively safe. You see the same sorts of things with car loans, boat loans, etc. In each case, the rates and fees are higher, because it is assumed the asset will lose more of its value with use, putting the lender at greater risk.

On the flipside, you can go out and get a credit card with a super-high interest rate, because the credit card company doesn't have the ability to come in take stuff they know will cover the bill if you stop paying (good luck trying to repossess theater tickets, restaurant meals, hotel stays, etc.). There are other points on the security/rate curve. Pawnbrokers will only loan you money if you leave the item they estimate will cover the value of the loan with them, and they still charge a high rate. For this, they will ignore and not disturb your credit report. Payday loans will loan you money against a post-dated check, a paystub, and a promise, but for this they charge APRs in the hundreds of percent. It goes on and on: rent-to-own furniture companies, receivables factoring. Perhaps the most extreme case, on the other end from a bank writing a mortgage loan, is loan sharks: these guys know they have no legal remedy at all to recover any money from you, so they (a) charge piratical rates and (b) threaten you with physical harm to keep you making payments.

I'm harping on this banks and lending thing so hard because even though you sound like you've given up on the banks, you still mention lending. All lending will to some degree work like this. It is the nature of lending, and it has been for thousands of years.

So you need to think, when you ask a question like this, "What would I be putting up against this loan?" In the case of expanding a yoga studio, the answer is probably roughly "nothing." There just isn't that much to pledge. In the case of a restaurant, you might be able to pledge some existing equipment. If you own some buildings, you could pledge those. Basically, it's like the board game Monopoly: to access credit at semi-reasonable rates, you need to have properties who's cards you can flip over.

My guess is most of the stuff you want to spend on expanding a yoga studio is money that will be immediately consumed: staff salaries, advertising, improvements to a physical location. This isn't bad, tons of business work this way. None of these things can be repossessed and sold to cover loan losses. Many, many things people want to get loans from the bank to do are fundamentally not credit-financeable (unless you count options like credit cards with 30% interest rates, which are unsecured loans. Things like Groupon fall into a similar category. A Groupon promotion, from the business's perspective is really an unsecured loan from Groupon's users, and it comes with a crippling interest rate to match) This puts you into a new realm: equity financing.

In this case, you are selling a piece of your business to someone else. They are taking on increased risk over the debt lender (because they have no security for their investment, like a house of known value they can repossess), but they have increased upside because they are participating in your business's eventual success. There are a million ways to structure this, but at the end of the day, the question you need to be answering is "Why would a person with a bunch of capital to invest invest in this?" Every business has a bunch of risks it faces, and it has its potential returns. You want to show this person that in your case, your business's potential returns outweigh the severity of it's risks.

There are generally a few ways to do this. In the case of a small, local business like a yoga studio, the best opportunity is to trade on your personal track record with people: "Hey, you know me, you know I always kick ass at everything I do, and so you have an unfair advantage over the broader market here, investment-wise." This is a really, really tough game. But you have to show someone who has the say $1m you want why investing with you is better than putting it in the bank, in an index fund, with a hedge fund, in a piece of real estate, in another startup, etc. At this level, there's a saying: "Bet on the jockey, not the horse" and so you are going to want to demonstrate your jockey value extensively.

The other alternative is essentially the government and non-profits. There may be cases where people who control large pools of money say "hey, you know what, we've noticed that yoga studios are a great way to revitalize certain commercial districts. They are cheap to start, they are popular, they draw a lot of foot traffic that spends money at other retail places, and in turn, they lift property values. Let's back them, for the good of the city as a whole." The grandaddy of these organizations is the SBA, but there are tons of smaller ones that operate at the state, regional, city, or neighborhood level. For a while in New York City you could get a huge tax credit just for hiring programmers to work on new stuff, because the city wanted their to be more people hacking on new stuff at small companies.

The last alternative that I can think of is not accessible to very many people: if you are a member of certain recent immigrant groups in your country, you may be able to access the shadow immigrant banking system, which persists for a variety of reasons that I won't go into here. Your profile doesn't say where you are. If this is available to you, you probably already know about it, but I'll put it here just in case and for the benefit of other readers. Sometimes, immigrant groups will have large amounts of "unbanked" members. Sometimes this is cultural habit, fear, or the fact that people are undocumented. People leave deposits with trusted old ladies (usually ladies as far as I've ever heard), who then evaluate potential borrowers or investments. The structure of these deals varies from community to community. A lot of times they are simple loans, made at very reasonable rates, because the lenders are essentially taking advantage of their much, much better ability to judge loan risk, and their much stronger network of social forces to ensure the loans are paid back. Frankly, I find this sort of thing fascinating, but I don't really know much about it.

HTH sorry for the insanely long answer, good luck.
posted by jeb at 2:29 PM on May 29, 2012 [11 favorites]

There are a lot of surprisingly good and astute answers here.

One thing that I would advise is for you to consult with local small businesses in your area. How did they raise capital? Presumably, there is a Chamber of Commerce or equivalent organization in your area; these kinds of places hold networking gatherings all the time.

Find a mentor, pick his or her brain, read up on business plans, and pound the pavement pitching potential investors.
posted by dfriedman at 4:22 PM on May 29, 2012

There is a big disconnect in my mind, at least, between "We want to borrow a million dollars" and "We want to expand my wife's yoga studio." I'm not seeing something here.
posted by yclipse at 7:20 PM on May 29, 2012 [3 favorites]

I have to agree -- the numbers and the example don't seem to match up, but that may just be because you don't want to mention the real thing. If you could be more precise with the comparables, it would help.

Banks don't have a staff that sits there and reads business plans and says, "Hey...a social network for college students, you know…this could be huge someday! We're in for a million bucks."

This, however, it should be said, describes many venture capital firms to a tee.

What you want, probably, is venture capital at the local level, or "angel investors" or "seed money" as it's also called. Basically, there may be a community foundation, or a business consortium, or just individual moneybags investors like surgeons and so forth who have money they want to "put to work" by investing in things like local businesses. If it's true that (in the analogy) your wife has a working yoga studio, this is great, because it's already successful. The way to find this money, as noted, is networking. Get on LinkedIn. Build a local network. Go to "after five" events. Join a downtown business association. Join a service club. People do these things so that they can make these connections, and often with the intent of capitalizing on them 2, 5, or 10 years down the road.

If you're at the right event or party, just like dating, it's good to just tell people what you're looking for. "My wife is the yoga studio down by the coffee shop -- you know it? Well, we find we just don't have the space for all the classes people are signing up for." Somebody is going to point you in the right direction eventually.
posted by dhartung at 8:32 PM on May 29, 2012

Simple answer ... ask your accountant. If you don't know, he should. And he will know enough about your finances to give you an honest answer about what your chances are with each option. And he can help you present your finances in the best possible way.
posted by jannw at 1:25 AM on May 30, 2012

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