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Most entrepreneurs face the dilemma of securing funding when starting a business. Almost every entrepreneur knows about Angel Investors and Venture Capital. However, this solution is not a one-size-fits-all solution and is usually only available until you have a proven track record or have built up critical mass with your target customers. So how will you fund your idea until then?
Standard Funding Source
The reality is that many ideas are not funded by angel investors and venture capitalists in the early stages. As a result, what ends up happening is that the entrepreneur will scrape together time and resources from your friends and their business networks to get the business up and running. During this stage, the entrepreneur often has to incur some expenses until the initial revenue is generated. If family and friends don’t provide initial funding, some entrepreneurs resort to their credit cards or even personal savings to take a business idea from concept to reality.
The recent financial crisis has made the situation more difficult for entrepreneurs and small businesses as the lending environment is extremely tight; Traditional financial institutions are becoming cautious with their money, making it difficult for new businesses to obtain loans.
All is not doom and gloom though. With every difficult period like this one, innovation seems to emerge. The financial industry is no exception and innovative solutions are emerging to help entrepreneurs make their dreams come true.
alternative funding source
Several options have emerged that connect people who have money with those who need it, and this is great news for those looking to start a new business: peer-to-peer lending, microfinance and crowdfunding are just some of the financial innovations emerging from the Web 2.0 revolution.
Microfinance (or Microcredit): The concept really gained popularity, thanks to Muhammad Yunus, Nobel laureate and founder of Grameen Bank. Since then, additional services like Kiva have emerged to help entrepreneurs get started. While sites like Kiva have focused primarily in third world countries, others have now opened the way for American entrepreneurs with the help of fantastic organizations like Axion USA and the Opportunity Fund.
Crowdfunding: The concept revolves around getting “the crowd” to you via widgets and websites. Widgets and websites enable enterprising individuals to raise funds from others via the Internet and through their social networks (such as Facebook, Twitter, MySpace, LinkedIn, etc.). The concept has worked well for the music industry, with sites like SliceThePie.com and SellaBand.com leading the crowdfunding movement.
Peer-to-Peer Lending: Last but not least, peer-to-peer lending sites like Lending Club or Prosper are becoming increasingly popular as a funding source for entrepreneurs. Also known as social lending and person-to-person lending, this concept refers to financial transactions that occur between individuals without the mediation of a traditional financial institution. About 7.5% of loans at Lending Club are used for business purposes up to $25,000. This option is not for everyone as the borrower will still have to meet certain requirements such as having a responsible credit history.
In short, if you have the right idea, passion, and drive to make it happen, don’t let it die: give it a chance.
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