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Contests, crowdfunding, and other ways to finance a small business without a bank loan

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In 2021, 1 in 3 small businesses looked for financing. Growthink used government and news sources to compile 10 alternatives to bank loans.
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Roughly 1 in 3 small businesses in the U.S. sought a loan in 2021. The top reason for a loan was to meet operating expenses, followed by funding a business expansion and refinancing debt.

That’s according to the latest Small Business Credit Survey from the Federal Reserve, which found that about 75% of those loan applicants applied for credit from banks.

A bank loan could propel your business to new heights if tapped for the right reasons and under the right conditions. But not every small business wants to borrow from a bank, nor can every small business get approved by a bank. In general, the larger a company’s revenue, the more likely it is to seek a bank loan, as opposed to financing from a nonbank online-only lender, according to the Fed. Online lenders, also sometimes called fintech lenders, offer a range of credit options for capital, including loans, lines of credit, and cash advances using different financing models.

When it comes to getting off the ground, only about 1 in 5 small businesses use a bank loan to get started. The rest rely on personal savings and less conventional sources. The younger a firm is, the more likely it is to seek alternative financing, the Fed survey found.  Young and startup enterprises may have increased difficulty accessing a traditional bank loan because they have less data on operations, fewer years in business, and may even need more proof of their business concept. Banks look at these factors to varying degrees when assessing whether a company or person is trustworthy enough to lend money.

Growthink compiled 10 alternatives to bank loans for small business funding, using information from the Small Business Administration, news coverage, and other sources. The good news is that many other funding sources are available to business owners if bootstrapping it alone seems daunting, has become onerous, or just feels downright impossible.

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Crowdfunding

Do you have a fully-fleshed idea for a product and are looking for capital to create it? Consider crowdfunding it. People often solicit funding on social networks or in public to crowdfund charities or other worthy causes. But increasingly, crowdfunding is being used to pay for developing innovative new products.

Sites such as Indiegogo and Kickstarter offer creators a way to connect with crowdfunded capital—and for many potential investors, opportunities to contribute small amounts of money that can add up to enough for a company to get moving. New platforms are emerging today as well, like StartEngine and SeedInvest.

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Home equity

Home equity loans are one nontraditional place a small business owner might consider when needing capital. This loan, of course, requires the business owner to be a homeowner and to have paid off a significant portion of their mortgage: Most lenders will want to see you’re able to pay a mortgage before issuing a new one. A home equity line of credit, or HELOC for short, allows the homeowner to take out a loan against the value of the real estate.

One thing to consider when considering a HELOC is that the home becomes collateral and could face foreclosure should the business fail to repay.

Two small business owners packing and shipping apparel in shop.

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Credit cards

Credit cards are one of the most popular forms of lending for consumers, but they’re also an option for businesses needing a smaller amount of cash soon. This route for alternative funding comes with added perks depending on the card, like airline miles, TSA PreCheck access, and cash back at certain places.

Another benefit is that, unlike commercial credit cards, there are business cards with no spending limits. This near-term financing comes with its risks, however. If the business owner carries a balance, they accrue additional debt. Interest rates can vary from 15% to 30% on cards offered by major institutions like American Express.

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Grants

Grants for small businesses are everywhere—if you’re looking in the right places. Grants tend to be no-strings-attached forms of funding, so they come in smaller amounts than other forms of financing, like loans.

The Small Business Administration finances loans under the Small Business Innovation Research and Small Business Technology Transfer programs. The programs aim to help entrepreneurs undertake significant research and development efforts. The SBA also runs a grant program to help small businesses expand internationally.

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Contests

There is almost always an institution offering a cash award in a contest for small businesses somewhere in the U.S.

FedEx makes $30,000 grants available to business owners through a yearly contest. Shopify offers a similar program. The Chamber of Commerce regularly holds cash award contests. Goldman Sachs has run its 10,000 Small Businesses accelerator program for more than a decade, which helps provide access to loans that average $52,000 per borrower.

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SBA microloans

The Small Business Administration offers loans of up to $50,000 to small business owners called “microloans.” These loans can be used for nearly any business expense except for real estate purchases and payments on existing debt.

The SBA approves several community-level financial institutions to distribute these loans, which the agency lists on its website. One of those institutions is California FarmLink, connecting California farmers with the capital they need to upgrade equipment and run their agricultural operations.

Two business owners discussing an application with a community development facilitator.

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Community development finance institutions

The Community Development Financial Institutions Fund is a pool of money overseen by the U.S. Treasury and doled out to financial institutions that lend to and support low- and moderate-income or underserved communities. It was created in 1994 by a bipartisan coalition in Congress under then-President Bill Clinton.

The fund intends to use federal funding to stimulate economic growth in these communities. The CDFI Coalition maintains a state-level database of organizations that have received funds from the Treasury. It shows, for example, that in 2021, lenders in Mississippi received more than $200 million in funding from the CDFI.

Almost half of the CDFI-certified institutions are those considered “mission-driven”—focused on a social purpose rather than, or in addition to, profits.

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Fintech lenders

Financial technology firms, sometimes called fintech or online lenders, have emerged in the last decade to fill lending gaps where traditional banks have fallen short.

Founded in 2008, Kabbage was so successful at connecting small businesses and entrepreneurs with microloans that American Express ultimately acquired it in 2020.

Another mechanism for funding that financial technology firms have brought to more businesses over the past decade is called “invoice factoring,” in which a company like Pipe buys a firm’s invoices at a discount and then collects the payments when they are due. It’s effectively a loan based on expected revenue, with cash upfront in exchange for payment down the road—and a fee, of course.

While online lenders have expanded access to credit and capital, the sector is also showing signs of becoming increasingly selective. In 2021, small business approval rates at online lenders declined as compared with 2020, according to the Fed. Small businesses also reported challenges with high interest rates and difficult repayment terms for loans obtained through online lenders in 2021.

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Angel investors

Depending on where your small business journey is—in development, starting up, early-stage, or growth—investors are looking to make a return on their fortunes and may want to lend to you.

Angel Investors are typically wealthy individuals seeking early-stage companies to invest in, to the tune of tens of thousands of dollars.

Since it’s riskier to invest in a company without much proof of concept, these investors may have higher expectations than others for how much return the business will generate for them and how quickly. These investors may also seek a company board seat or equity in the firm to exert some control over its trajectory.

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Venture capital

If you’re seeking funding at a later stage, there are hordes of venture capital firms looking for businesses that can grow their money.

In 2022, venture capitalists have invested some $300 billion in businesses around the world, according to the latest quarterly data from CB Insights. Like angel investors, a VC or VC firm may require equity in your business in exchange for cash. As partial owners, they contribute consultation and help make connections with other players in your industry.

VCs tend to invest millions of dollars depending on the company and its trajectory.

This story originally appeared on Growthink and was produced and
distributed in partnership with Stacker Studio.

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How businesses can protect themselves from the rising threat of deepfakes

Dive into the world of deepfakes and explore the risks, strategies and insights to fortify your organization’s defences

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In Billy Joel’s latest video for the just-released song Turn the Lights Back On, it features him in several deepfakes, singing the tune as himself, but decades younger. The technology has advanced to the extent that it’s difficult to distinguish between that of a fake 30-year-old Joel, and the real 75-year-old today.

This is where tech is being used for good. But when it’s used with bad intent, it can spell disaster. In mid-February, a report showed a clerk at a Hong Kong multinational who was hoodwinked by a deepfake impersonating senior executives in a video, resulting in a $35 million theft.

Deepfake technology, a form of artificial intelligence (AI), is capable of creating highly realistic fake videos, images, or audio recordings. In just a few years, these digital manipulations have become so sophisticated that they can convincingly depict people saying or doing things that they never actually did. In little time, the tech will become readily available to the layperson, who’ll require few programming skills.

Legislators are taking note

In the US, the Federal Trade Commission proposed a ban on those who impersonate others using deepfakes — the greatest concern being how it can be used to fool consumers. The Feb. 16 ban further noted that an increasing number of complaints have been filed from “impersonation-based fraud.”

A Financial Post article outlined that Ontario’s information and privacy commissioner, Patricia Kosseim, says she feels “a sense of urgency” to act on artificial intelligence as the technology improves. “Malicious actors have found ways to synthetically mimic executive’s voices down to their exact tone and accent, duping employees into thinking their boss is asking them to transfer funds to a perpetrator’s account,” the report said. Ontario’s Trustworthy Artificial Intelligence Framework, for which she consults, aims to set guides on the public sector use of AI.

In a recent Microsoft blog, the company stated their plan is to work with the tech industry and government to foster a safer digital ecosystem and tackle the challenges posed by AI abuse collectively. The company also said it’s already taking preventative steps, such as “ongoing red team analysis, preemptive classifiers, the blocking of abusive prompts, automated testing, and rapid bans of users who abuse the system” as well as using watermarks and metadata.

That prevention will also include enhancing public understanding of the risks associated with deepfakes and how to distinguish between legitimate and manipulated content.

Cybercriminals are also using deepfakes to apply for remote jobs. The scam starts by posting fake job listings to collect information from the candidates, then uses deepfake video technology during remote interviews to steal data or unleash ransomware. More than 16,000 people reported that they were victims of this scam to the FBI in 2020. In the US, this kind of fraud has resulted in a loss of more than $3 billion USD. Where possible, they recommend job interviews should be in person to avoid these threats.

Catching fakes in the workplace

There are detector programs, but they’re not flawless. 

When engineers at the Canadian company Dessa first tested a deepfake detector that was built using Google’s synthetic videos, they found it failed more than 40% of the time. The Seattle Times noted that the problem in question was eventually fixed, and it comes down to the fact that “a detector is only as good as the data used to train it.” But, because the tech is advancing so rapidly, detection will require constant reinvention.

There are other detection services, often tracing blood flow in the face, or errant eye movements, but these might lose steam once the hackers figure out what sends up red flags.

“As deepfake technology becomes more widespread and accessible, it will become increasingly difficult to trust the authenticity of digital content,” noted Javed Khan, owner of Ontario-based marketing firm EMpression. He said a focus of the business is to monitor upcoming trends in tech and share the ideas in a simple way to entrepreneurs and small business owners.

To preempt deepfake problems in the workplace, he recommended regular training sessions for employees. A good starting point, he said, would be to test them on MIT’s eight ways the layperson can try to discern a deepfake on their own, ranging from unusual blinking, smooth skin, and lighting.

Businesses should proactively communicate through newsletters, social media posts, industry forums, and workshops, about the risks associated with deepfake manipulation, he told DX Journal, to “stay updated on emerging threats and best practices.”

To keep ahead of any possible attacks, he said companies should establish protocols for “responding swiftly” to potential deepfake attacks, including issuing public statements or corrective actions.

How can a deepfake attack impact business?

The potential to malign a company’s reputation with a single deepfake should not be underestimated.

“Deepfakes could be racist. It could be sexist. It doesn’t matter — by the time it gets known that it’s fake, the damage could be already done. And this is the problem,” said Alan Smithson, co-founder of Mississauga-based MetaVRse and investor at Your Director AI.

“Building a brand is hard, and then it can be destroyed in a second,” Smithson told DX Journal. “The technology is getting so good, so cheap, so fast, that the power of this is in everybody’s hands now.”

One of the possible solutions is for businesses to have a code word when communicating over video as a way to determine who’s real and who’s not. But Smithson cautioned that the word shouldn’t be shared around cell phones or computers because “we don’t know what devices are listening to us.”

He said governments and companies will need to employ blockchain or watermarks to identify fraudulent messages. “Otherwise, this is gonna get crazy,” he added, noting that Sora — the new AI text to video program — is “mind-blowingly good” and in another two years could be “indistinguishable from anything we create as humans.”

“Maybe the governments will step in and punish them harshly enough that it will just be so unreasonable to use these technologies for bad,” he continued. And yet, he lamented that many foreign actors in enemy countries would not be deterred by one country’s law. It’s one downside he said will always be a sticking point.

It would appear that for now, two defence mechanisms are the saving grace to the growing threat posed by deepfakes: legal and regulatory responses, and continuous vigilance and adaptation to mitigate risks. The question remains, however, whether safety will keep up with the speed of innovation.

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Small banks emerge as the top source for small business financing

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Findbusinesses4sale used the Fed's Small Business Credit Survey data to compare approval rates among small business financing options.
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When it comes to borrowing money, small businesses are most likely to apply at large banks. But they often find success with their counterparts in the finance world: small banks.

Small banks—or those with less than $10 billion in total assets—comprise most of the banks in the U.S., much like small businesses account for nearly all U.S. businesses. More than 80% of small businesses that applied for financing at small banks were at least partially approved in 2022, according to data from the Fed’s most recent survey of small business employers. However, only 30% of small businesses applied at small banks when they sought financing.

About 2 in 5 small business employers applied for some traditional financing in 2022. Most needed the money to meet operating expenses, while a little over half sought cash to expand their operations.

Findbusinesses4sale used the Fed’s Small Business Credit Survey data to compare approval rates among small business financing sources, taking a closer look at their differences. Approval rates are based on applications for loans, credit, and cash advances at the various institution types. The Fed report was released in March 2023 based on a 2022 survey of nearly 8,000 small businesses with employees.


A bar chart shows the share of small business applicants at least partially approved for loan requests, separated by the type of source applied to.

Findbusinesses4sale

Small banks surpass online lenders, finance companies in approval rates for small business applicants

Also known as community banks, small banks are well-equipped to lend to small businesses because of their intimate knowledge of local economies. Small businesses are often young, with short histories, small operations, little collateral, and unproven financial success. These factors can make it difficult for founders to qualify for credit and loans—they’re simply a riskier investment for a funder to take on.

Small banks’ decision-makers live within the same areas where they grant loans, and they have insight into how certain businesses could fare within their neighborhoods. That makes it easier for them to analyze the risk of lending to small businesses and, in turn, decide whether to approve their applications. At least 3 in 5 (61%) applicants considered to be a medium or high credit risk were approved for financing at small banks; at large banks, not even half (45%) of these riskier applicants were approved.

By operating across smaller locales, community bank operators also have the opportunity to forge stronger relationships with business founders. The Fed survey shows that about 2 in 3 small businesses that applied for financing with these banks did so because of an existing relationship. Many of these relationships were forged in the heat of the COVID-19 pandemic, when community banks came through for small businesses with relief funds, including more intensive support in understanding and completing complex applications.

Small firms applying to other sources, such as online lenders and finance companies, are most often motivated by making quick decisions and perceiving that they have a higher chance of being approved. That was the case five years ago, but approval rates for both sources lagged behind small banks in 2022. Indeed, approval rates at both have fallen significantly since 2019, while approvals at small banks have grown.

Both online lenders and finance companies still approve slightly higher shares of applicants with medium to high credit risks compared to small banks, but only by a few percentage points. At the same time, many more borrowers reported dissatisfaction and challenges working with these lenders, including high interest rates and unfavorable repayment terms.

On the other hand, the vast majority of borrowers from small banks were happy with their experience—much more than those who borrowed from any other type of lender.

Story editing by Ashleigh Graf. Copy editing by Paris Close. Photo selection by Ania Antecka.

This story originally appeared on Findbusinesses4sale and was produced and
distributed in partnership with Stacker Studio.

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The new reality of how VR can change how we work

It’s not just for gaming — from saving lives to training remote staff, here’s how virtual reality is changing the game for businesses

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Until a few weeks ago, you might have thought that “virtual reality” and its cousin “augmented reality” were fads that had come and gone. At the peak of the last frenzy around the technology, the company formerly known as Facebook changed its name to Meta in 2021, as a sign of how determined founder Mark Zuckerberg was to create a VR “metaverse,” complete with cartoon avatars (who for some reason had no legs — they’ve got legs now, but there are some restrictions on how they work).

Meta has since spent more than $36 billion on metaverse research and development, but so far has relatively little to show for it. Meta has sold about 20 million of its Quest VR headsets so far, but according to some reports, not many people are spending a lot of time in the metaverse. And a lack of legs for your avatar probably isn’t the main reason. No doubt many were wondering: What are we supposed to be doing in here?

The evolution of virtual reality

Things changed fairly dramatically in June, however, when Apple demoed its Vision Pro headset, and then in early February when they were finally available for sale. At $3,499 US, the device is definitely not for the average consumer, but using it has changed the way some think about virtual reality, or the “metaverse,” or whatever we choose to call it.

Some of the enhancements that Apple has come up with for the VR headset experience have convinced Vision Pro true believers that we are either at or close to the same kind of inflection point that we saw after the release of the original iPhone in 2007.Others, however, aren’t so sure we are there yet.

The metaverse sounds like a place where you bump into giant dinosaur avatars or play virtual tennis, but ‘spatial computing’ puts the focus on using a VR headset to enhance what users already do on their computers. Some users generate multiple virtual screens that hang in the air in front of them, allowing them to walk around their homes or offices and always have their virtual desktop in front of them.

VR fans are excited about the prospect of watching a movie on what looks like a 100-foot-wide TV screen hanging in the air in front of them, or playing a video game. But what about work-related uses of a headset like the Vision Pro? 

Innovating health care with VR technology

One of the most obvious applications is in medicine, where doctors are already using remote viewing software to perform checkups or even operations. At Cambridge University, game designers and cancer researchers have teamed up to make it easier to see cancer cells and distinguish between different kinds.

Heads-up displays and other similar kinds of technology are already in use in aerospace engineering and other fields, because they allow workers to see a wiring diagram or schematic while working to repair it. VR headsets could make such tasks even easier, by making those diagrams or schematics even larger, and superimposing them on the real thing. The same kind of process could work for digital scans of a patient during an operation.

Using virtual reality, patients and doctors could also do remote consultations more easily, allowing patients to describe visually what is happening with them, and giving health professionals the ability to offer tips and direct recommendations in a visual way. 

This would not only help with providing care to people who live in remote areas, but could also help when there is a language barrier between doctor and patient. 

Impacting industry worldwide

One technology consulting firm writes that using a Vision Pro or other VR headset to streamline assembly and quality control in maintenance tasks. Overlaying diagrams, 3D models, and other digital information onto an object in real time could enable “more efficient and error-free assembly processes,” by providing visual cues, step-by-step guidance, and real-time feedback. 

In addition to these kinds of uses, virtual reality could also be used for remote onboarding for new staff in a variety of different roles, by allowing them to move around and practice training tasks in a virtual environment.

Some technology watchers believe that the retail industry could be transformed by virtual reality as well. Millions of consumers have become used to buying online, but some categories such as clothing and furniture have lagged, in part because it is difficult to tell what a piece of clothing might look like once you are wearing it, or what that chair will look like in your home. But VR promises the kind of immersive experience where that becomes possible.

While many consumers may see this technology only as an avenue for gaming and entertainment, it’s already being leveraged by businesses in manufacturing, health care and workforce development. Even in 2020, 91 per cent of businesses surveyed by TechRepublic either used or planned to adopt VR or AR technology — and as these technological advances continue, adoption is likely to keep ramping up.

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