The More You Know: 5 Uncommon Sources of Capital for Metro Detroit Entrepreneurs

Special thank you to Cody Borke for co-authoring this article! Cody is a 2019 graduate of Western Michigan University who is spending his gap year working at Fausone Bohn. Cody plans to go to law school in 2020 and specialize in corporate and business law.

According to a recent Capital Access Report authored by the Eckblad Group and the New Economic Initiative (NEI), small businesses are more important than ever. They play a critical role in not only Detroit’s overall economic development, but also in neighborhood revitalization. However, small businesses need capital – whether to pay for start-up costs, expansion, routine operations, or even emergency hardships.

Many business owners or entrepreneurs begin their journey with a substantial loan from either a local bank in their community or a large national bank. Such a loan is not always an option due to obstacles such as a lack of a credit history or insufficient collateral. But what many businessmen and women do not know is that there are readily available alternatives:

  • Microlending – this term encompasses small business loans of up to $50,000. Microlending allows small business owners to establish a line of credit and is a quick way to receive a loan. Microloans can be received in as little as 14 days, and are offered by non-profits, community development corporations, and certain financial institutions. Such loans may enjoy lower interest rates and access, as the lenders often receive tax incentives.
  • Online lenders – this alternative to the traditional brick-and-mortar bank has become very common with the increase in the use of and access to technology. A smartphone essentially gives an entrepreneur bank access 24/7. Online banking institutions (such as Ally Bank) have developed a form of credit products that are easily accessible in as little as 24 hours. Online lenders can process loans much faster than traditional banks or other financial institutions . Also, with online lending, business owners usually enjoy minimal collateral requirements and lower interest rates, as the online banks try to stay competitive with traditional banks, as well as their online competitors.
  • Nonprofit lenders and Community Development Financial institutions (CDFIs) – these are critical sources for capital for those that are new to credit or in need of small amounts of capital. This is also a way to help new entrepreneurs establish credit, while also learning credit management skills that will help them as they work their way to larger amounts of credit. These entities provide educational tools together with financing access to ensure success.
  • Crowdfunding – the term describes the use of small amounts of money from a large number of people to finance a business. This idea expands the network from a small group of “investors” to a much larger group of “investors.” This can be done through many phone apps or websites – think Kickstarter. However, the regulatory climate is still uncertain with respect to whether the Securities and Exchange Commission regulates crowdfunding. Also, business owners may be reluctant to involve multiple “micro-investors” in their business.
  • Grants – communities and non-profit entities also offer grants to entrepreneurs, provided they meet certain criteria to be eligible for funding. The benefit of a grant is that it does not need to be repaid like a loan. However, they are not as readily available as borrowed money and the length of the approval process makes grants more appropriate as a long-term capital strategy, rather than a source of immediate or start-up capital.

Remember, a traditional bank is not the only option for capital. Do your due diligence and connect with local organizations that will help with your capital needs. A good place to start is the Michigan Economic Development Corporation (MEDC). Whatever the size and focus of your business, there is likely a resource there for you.

And do not forget that as you start your business, you will need to form a corporate entity and draft basic corporate forms to protect your assets. Contact Dan Artaev at dartaev@fb-firm.com or 248-380-0000 for a consultation about your business legal needs.

 

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