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17 Ways to Raise Capital
By Dave Vagnoni
April 2012

Need an injection of cash to grow your business? Tired of limited financing options? Wondering where you can find new funding ideas? Check out our guide for ways to get capital now.

17 Ways to Raise CapitalYes, this really did happen.

Back in early 2010, when the lending market was still in an Ice Age, Kevin Scharnek walked into Town Bank in Hartland, WI, and negotiated a deal anyone could warm up to. "We got a line of credit and a prime rate with a 4.5% floor," he says. "I don't think they'd give us that same rate today."

So what was Scharnek's trick? "Maybe we hit them on a good day," he jokes. "There's no shame in seeing what a bank can do. We had no debt, solid cash flow and good history. We were a good risk."

Scharnek, the president of distributor 14 West (asi/197092), has used that line of credit to double the size of his staff, leading, in part, to a 20% jump in sales in 2011. He continues to leverage his success, turning to different local banks to help finance growth. "Now is a great time to shop banks," he says. "Banks have to do deals to make money."

For the longest time, though, banks just weren't willing to deal with any companies. In 2009, banks originated only $73 billion in loans to small businesses, $64.6 billion less than they extended two years earlier. "Lending conditions were deplorable, with banks looking to lend only to the highest risk-rated borrowers," says Manny Skevofilax, president of PORTAL CFO Consulting. "Borrowers with losses and weak balance sheets were effectively shut out of the lending market."

Finally, late last year, there was a bit of a thaw. At the close of 2011, three of the four largest banks in the U.S. – Chase, Citibank and Wells Fargo – announced they had increased their small-business lending by a combined $40 billion overall. "Right now, small businesses have their best chance in years to get a loan that'll help them grow," says Grady Hedgespeth, director of the U.S. Small Business Administration's (SBA) Office of Financial Assistance.

Of course, getting a bank loan is only one way a small business can achieve financing and, experts say, it might not always be the best approach. Here, Counselor offers 17 strategies – some conventional and others out-of-the-box – that businesses can use to raise capital.

#1 Apply For A Grant

In tiny Phillipsburg, KS – population 2,581 – financing options abound, if you know where to look. Wanting a heat-transfer machine to help increase apparel sales, Sheila Roberts is turning to her local economic development agency for some cash. "They give out $300,000 in grant money every year," she says. "Right now, we're doing the paperwork to provide an ROI analysis and to prove we're financially stable."

Roberts, the co-owner of Sign Solutions (asi/326834), also points to her town's Discover Main Street initiative as a source for capital. "It's a historic association that offers funding for storefront renovations and equipment," she says.

In Phillipsburg and around the country, locally administered programs offer excellent opportunities for a cash infusion. Also consider grant programs run by corporations and charitable foundations. Go to to research possibilities.

#2 Draw From Retirement Funds

Wondering how you'd tap into your 401(k) for capital without incurring early withdrawal penalties? Turn to the Rainmaker Plan, of course. Founded in 1983, Philadelphia-based firm Benetrends was the first to design a successful four-step workaround – nicknamed the Rainmaker – allowing entrepreneurs to access typically off-limit personal funds for business use. "Our strategy involves establishing a C corporation and then sponsoring a new retirement plan," says Dallas Kerley, chief development officer at Benetrends. "Funds can then be rolled over into the new retirement plan, and you can invest in any purpose."

What does the Internal Revenue Service (IRS) think about this? In the last 30 years, more than 10,000 businesses have gained financing through 401(k) and IRA funding, but Benetrends has never had the IRS disqualify a plan. "As long as it's properly administered, there's not a problem," Kerley says. "A lot of people like to invest in themselves."

#3 Tap Personal Connections

Many consultants say family and friends shouldn't be the first place to turn for financial assistance, but they also say it doesn't have to be the last. "You'll likely get more favorable terms and if you're a few days late on a payment, they won't rip you apart," says Cliff Ennico, an attorney and author of Small Business Survival Guide. "You still need to get agreements in writing and get the same documentation you would in dealing with a bank. You can't just do it informally."

Without a clear arrangement, a relative or friend who gave you money as a gift could later claim the cash was intended as a loan, especially if your business succeeds. "It would really be your word against Uncle Cliff's," says Ennico.

#4 Peer-To-Peer Lending

Don't want to borrow money from those you know? Then ask a stranger. Peer-to-peer (P2P) lending sites, like and, continue to flourish, offering businesses better rates than banks and investors a low floor for entry. Prosper, for example, funded $10.8 million in loans in January alone as borrower listings increased by 30%. "Small-business owners are enjoying the speed of funding, ease of use and good rates of peer-to-peer lending," says Chris Larsen, CEO and co-founder of Prosper.

In theory, P2P lending allows those who want to borrow to apply online, quickly get a rate quote (based on credit history, loan term and amount) and then choose from among several loan options upon qualification. Loans are listed on a website for a period of time during which interested lenders can contribute funds. Investors build their portfolio of consumer notes and, while engaging in more risk, can earn considerably better returns than they could through traditional savings plans.

"In 2011, we saw nearly 190% growth in our small business-related loans," Larsen says. "Small businesses of all types are finding P2P lending to be an attractive, flexible source of capital for their business."

#5 Borrow Against A Life Insurance Policy

Need cash fast? Can't find a lender? Consider borrowing against your whole life insurance policy. "This provides an easy source of cash without having to go to a bank and apply for a business loan," says David Grebber, head of advanced markets at Farmers Insurance Group. "If you withdraw money from the cash value as a loan, the money you take is not taxable as long as the policy is still in force."

While the terms may seem favorable at first, you need to remember that policy loans aren't free. "The policy contract will specify a loan interest factor that will be added to the amount withdrawn from the policy as a tax-free loan," Grebber says. "This interest amount will be added to the outstanding loan balance whether or not it is actually paid back."

What does that mean for your policy? Both the interest amount and the loan balance will be deducted from the death benefit if you fail to repay the loan.

#6 Enter A Contest

Want to win some extra money and do a little networking while you're at it? Enter a small-business contest. One of the most popular national contests in recent years – called Love A Local Business – was launched by software firm Intuit in 2009. "The program gives small businesses the opportunity to win cash through the support of their customers, employees and communities," says Monica Appelbe, a public relations manager at Intuit.

After filling out an outline form, small businesses rally their supporters and ask for votes. The more votes a company receives, the more raffle-type tickets it earns. "At the end of the month, we randomly select a winner," Appelbe says.

Each month, Intuit awards $25,000 to a company. To date, Intuit has provided nearly $1.1 million to 96 small businesses through the contest. "Beyond the cash, we've heard from contest winners that Love a Local Business has been a fantastic marketing tool," says Appelbe. "Each entry acts as a mini business review. Hearing praise from their customers has been incredibly inspiring."

#7 Lease Equipment

If you need capital for an equipment purchase – anything from computers to vehicles to furniture – striking a deal with a leasing company may make sense. "Our credit requirements are more lenient than banks, and our qualification process is much quicker," says Mark French, president of Atlanta-based leasing company Crest Capital. "If we're doing a five-figure deal, there's an application-only process so we don't need to see financial statements. We do a lot of one-day approvals. Then, once a deal is agreed on, there's no need to re-qualify every year."

Most lessees will grant five-year terms with fixed monthly payments and give businesses the option to purchase the equipment outright at the end of the lease. "A lot of businesses come to us out of convenience," says French. "We'll finance just about anything."

#8 Choose A Business Incubator

Wondering how you can afford to move your home-based business into actual office space?

Take part in a business incubation program. "Business incubators really took off in the 1990s with the Silicon Valley tech boom of the time," says Paul Browne, executive director of the Carbondale Technology Transfer Center (CTTC), which provides 30,000 square feet of incubation space in northeast Pennsylvania. "What we do is help companies secure space for a cost that's at or below the market price. We also offer guided access to financing."

Businesses typically join incubation programs for three to five years and share space with other entrepreneurs. Besides having their rent subsidized, tenants are supported with access to computers, office equipment and business experts. In some accelerated business incubation programs, tenants are intensively trained by a group of successful business professionals. At the end of the incubation term, tenants can make a pitch to investors to win financing in exchange for a small equity stake.

#9 Get A Cash Advance

If you're looking for a creative way to raise capital, a cash advance strategy may work for your business. In one approach, offered by New York-based Merchant Cash and Capital (MCC), advance money is provided without a need for a personal guarantee. MCC will fund between 100% and 200% of total monthly credit card volume as an unsecured cash advance, taking 10% to 25% of daily processed revenues to repay what's owed.

"We take a fixed percentage of future credit card sales," says Stephen Sheinbaum, MCC's president. "We also understand the seasonality of business, so more is paid back when more money is made and less when less money is made. If a company goes out of business, nothing is owed, so there's no risk."

As part of the program, MCC asks recipients to use one of its preferred credit card processing vendors, which then collects an agreed-upon percentage of revenues for repayment. One note: Visa, MasterCard and Discover cards can all be used, but American Express can't be because it doesn't use a third-party processor.

#10 Embrace Angel Investors

Many so-called angel investors gravitate toward funding start-up firms, but don't discount them as providers of capital for business expansion. Angels, who are normally wealthy, experienced entrepreneurs, invest in a company in exchange for an ownership stake, hoping to cash in when a business booms. "Angel investors have meetings where they hold pitch contests similar to the TV show Shark Tank," says Lucinda Cross, founder of New York-based consultancy Activate! "Angels want to know what they can get out of your proposal, but they also like to connect themselves with a cause."

Angel networks – groups of 10 or more investors – are becoming more popular, and it's common for each member to contribute $10,000 or more to a business they see potential in. Most angels don't expect to oversee day-to-day operations and tend to be a hands-off crowd. So how do you find them? Experts suggest attending local networking functions and browsing the Internet. Sites like offer investor directories by geography.

#11 Use Credit Cards

"Very psychotic." That's how Angie Campbell (with a bit of a laugh) describes herself when it comes to keeping track of expenses. "I use an Excel spreadsheet and I know when a payment is due," she says. Her attention to detail has certainly paid off. Campbell, the owner of St. Louis-based distributor Put A Logo On It Promotions (asi/301869), has perfect credit, and as she was building her company in 2009 she was already quite popular with card companies.

"They'd offer 0% interest cards all the time," she says. "I started off with five cards, and that lasted one year. Then I switched the balances to another 0% card. Eventually, I made enough money that I had a $20,000 cash flow. I've kept growing and growing." In 2011, in fact, Campbell earned $325,000 in sales in just her third year in business. "I've never gone over my credit limit and I've used cards that provide good rewards," she says. "I recently received $750 in reward cash."

Unless you're like Campbell, though, with a sparkling credit history, you need to weigh the pros and cons of using credit cards before you go all-in. It's true that credit cards are generally easier to acquire than bank financing, but interest rates tend to be much (often 10%) higher. In the short term, cards can certainly help you pay suppliers while you await money from your clients, but in the long term, your cash flow has to be positive. Otherwise, you risk becoming a target of card companies notorious for attaching hair-trigger late fees.

#12 Check Out Crowd-Funding

Crowd-funding is a tactic that's gaining traction as an innovative way to raise money today, but you have to understand the legalities involved before jumping in. Because of long-standing U.S. Securities and Exchange Commission rules, crowd-funding (in which a crowd of Internet browsers literally funds a project) is only legal in non-equity agreements, meaning contributors can't expect any financial return – including interest payments.

"It generally works by the entrepreneur posting information about their business on a crowd-funding platform like," says Dave Lavinsky, founder of consultancy Growthink. "In return for funding, the entrepreneur offers rewards, which are often future deliveries of a product or service."

In this model, entrepreneurs pitch ideas and funders provide donations. If an idea doesn't receive a targeted monetary amount, all donations are returned. In 2011, 11,836 entrepreneurs and small-business owners – or 46% of those who tried – got funding through Kickstarter. And, Congress is currently debating bills that would ease the rules on crowd-funding to make it more of an investment for people who pitch in capital. While one measure passed through the House of Representatives late in 2011, a bill has yet to reach the desk of President Obama, who has said he would support it.

#13 Leverage SBA Programs

More than 3,000 banks provided at least one SBA-guaranteed loan in 2011, a "significant" increase over 2010, according to the government agency. "Last year was solid and banks got back into lending," says Hedgespeth. "We're seeing good activity across the spectrum."

The most popular of the offerings backed by the SBA is still the 7(a) loan, which can be used to finance almost any business need. The limit for this loan was recently increased from $2 million to $5 million. "This loan gives the most flexibility, and with the limit raised it's a lot more robust," Hedgespeth says.

Other lending options sponsored by the SBA are microloans (which average $13,000 each) and 504 loans, the latter of which can be used to purchase equipment or real estate. A nonprofit corporation called a certified development company funds 40% of a 504 loan, while a bank adds 50% and the borrower puts down the final 10% of the financed amount. "This is a great opportunity for small-business owners because the rates are fixed for 20 years at under 5%," Hedgespeth says.

#14 Approach Smaller Lenders

While the country's biggest banks have the most money, smaller lenders are often more willing to help newer businesses. That was the experience of Cassandra Blanchard, owner of Dallas-based distributor Ikonikal (asi/158936). "I went to Bank of America and they referred me to the National Bank of Texas," Blanchard says. "It's a local bank, and they've wanted every last detail on my finances and my husband's finances, but they've been really nice."

What exactly does "every last detail" mean? "They asked for three years of tax returns; they wanted to see my mortgage payments, understand my assets and liabilities, any stocks I own, any education fees that have to be paid, plus property I own and my car payment," she says. "They also wanted to know how long I thought it would take to pay the loan back."

Before you meet with a bank lending officer, it's important as well to put together a business plan that includes reasonable sales expectations that point toward a profit. It should also be clear why you're asking for a loan and how that money will help your business grow. "I asked for $20,000 to do some website marketing, for a better site design and improved SEO," Blanchard says.

Besides smaller, local banks, credit unions (you need to be a member to get a loan) are also becoming viable alternatives to national lenders. St. Mary's Bank, the nation's oldest credit union, lends tens of millions of dollars each year to businesses, with loans ranging from $50,000 to $400,000.

#15 Tap Non-Traditional Lenders

Even though banks insist they've increased lending in the last six months, many business owners simply don't have the collateral they need to secure financing. "In the past, it was common to get a home equity line of credit," says Jeffrey Sweeney, CEO of US Capital Partners. "That was an inexpensive source of growth capital that's virtually not available anymore."

With fewer conventional options in the market, alternative lenders, like Sweeney's San Francisco-based firm, have become increasingly popular. US Capital Partners is, in effect, a private investment bank that can lend directly to businesses, through asset-based (usually inventory or equipment) loans, or organize financing partnerships. "We're both a lender and a broker," Sweeney says. "We have our own fund, so we can get a lot of traction."

Non-traditional lending firms also tend to have a network of finance professionals that can raise funds. "We have 21 lenders available – some offer hard money loans and some don't," says Stephen De Marie, vice president of Strategic Capital Consulting. "There is money out there, but it takes the right service to find the funds. We have a model that helps a business raise capital, reduce costs and increase cash flow. We help with marketing, too."

While some firms provide creative financing, others aggressively look to buy minority or majority stakes in businesses. Chicago-based private equity firm Hadley Capital focuses on purchases of relatively smaller (under $15 million in annual sales), profitable companies that have a strong regional presence and an established leadership team. "We're not going to get involved in the month-to-month decisions of a company," says Clay Brock, a partner at Hadley. "We'll provide capital, offer coaching and make major decisions."

#16 Affiliate With Larger Firms

Jennifer Crowder thinks it's one of the smartest decisions she's ever made. "It's been a great move for us," she says. "We've really been pleased."

It was late last year when Crowder, a co-owner of GR Promotions, decided to merge her business with Counselor Top 40 distributor The Vernon Company (asi/351700). "We looked at other large distributors, but found Vernon listened to us and had by far the most down-to-earth people," Crowder says.

In addition to taking over GR Promotions' back-office operations, Vernon has provided financial stability, streamlined systems and given a cash-flow boost. "When one of our salespeople puts in an order, they get paid by Vernon upfront, instead of having to wait until later in the process like before," Crowder says. "They also provide rewards for reaching sales goals, like trips."

GR Promotions, which kept its name in the transition, can also more efficiently pay suppliers with Vernon's help, eliminating cash flow worries. In a sense, Vernon has become an investor partner for GR, allowing Crowder to focus on her goal of crafting an exit strategy. "We have a rep that's taking the business over in five years," she says. "He's pleased with the buyout."

#17 Offer Early Payment Discounts

When mobile messaging company Qittle was in its infancy, CEO Casey McConnell raised capital by making his clients an offer they loved. "We gave them a discount for prepayment on our services," McConnell says. "The extra money let us make investments in other parts of our business. It was something I learned from my dad as a kid. He offered prepayment discounts in his construction business."

The discounts were attention-grabbing – 10% or higher, depending on how many months in advance clients paid. The goal was to bring in payments that would've otherwise been made six months to a year later. "Clients were very open to it, and in our early years it seemed they really wanted to help us get ahead," McConnell says. "I think it also provided some incentive for them to use our services. It's definitely a short-term strategy, but it was a win-win."

Dave Vagnoni is a senior editor for Counselor.

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