10 ways to raise business capital during a recession
Photo by Razvan Chisu on Unsplash
When US financial markets crashed in 2008, the national economy and many other national economies worldwide went down. It was a financially grim period known as the Great Recession, the worst global financial disaster since the Great Depression of the early 1900s.
While the crisis persisted until June 2009, business continued as usual, and we even saw the beginnings of some of today’s household names like Airbnb and Uber. These companies prove entrepreneurs should keep the fire burning through an economic downturn, especially when raising capital.
The process will be more stringent and time-consuming as everyone becomes more cautious about money. But financial institutions and other entities have kept their doors open to the business sector. All it takes is to find matching opportunities for the financier and the financed.
Ten ways to raise business capital in a recession
In a Harvard Business Review article, experts advise investors to stay the course through a recession, knowing this is usually short-lived, followed by extended periods of expansion. Below are ten capital-raising options during an economically tumultuous time:
1. Bank loans
Banks are generally strict about approving business loan applications. During a recession, they tend to tighten up even more, which is understandable as everyone tries to be more judicious with their resources.
Nonetheless, banks remain open to business loan applications even during an economic collapse, although interest rates tend to be higher. Loan officers may also be more discriminating when assessing applicants for creditworthiness, sometimes even asking for collateral to secure loans.
2. Angel investors
Angel investors are wealthy individuals who help entrepreneurs in the early stages of their ventures. They also assist existing businesses trying to augment their staff or survive a difficult phase. Compared to other investors, angel investors are known to be extraordinarily patient and understanding.
There are several ways to find angel investors during a recession. Entrepreneurs can join online platforms or pitch events, where startups meet investors and pitch their business ideas. When bringing an angel investor into a venture, a company or entrepreneur must be ready to give up some equity in exchange for the funding provided.
3. Venture capital funding
Venture capitalists are like angel investors. They both pour capital into businesses, but that’s usually where the similarity ends. Angel investors use personal money to fund ventures. Meanwhile, capitalists are part of a company investing group resources.
Angel investors are also usually involved in the actual operations of the business and provide expert advice. In contrast, capitalists focus on financing and profitability. Lastly, venture capitalists are more likely to work with more prominent companies with a proven track record of success.
4. Business grants
Business grants are another viable option for raising business capital during a recession. As a form of free financing provided by governments, companies, or philanthropists, grants are usually focused on helping small businesses thrive. They are designed for job creation, improvement of local economies, and supporting other projects that typical lenders don’t work with.
Business grants are like business loans, except the grantees don’t have to pay them back. The requirements can also be rigid. For instance, the terms of eligibility can be very specific, application and approval can take much longer, and competition is usually high. At any rate, people can still get business grants during a recession, but often with a few extra steps and for a little more time than usual.
5. British Business Bank (BBB) loans
Owned by the British government, the BBB routinely helps small businesses thrive, especially during a recession. They offer various programs that cater to the needs of different entrepreneurs at different stages of their ventures.
They may provide startup loans directly to individuals who want to start a new business, or they can provide loan guarantees to help them source funds from other lenders. The Enterprise Finance Guarantee (EFG) is an example of a BBB scheme that helps facilitate lending to small and medium-sized enterprises (SMEs).
6. Supplier credit
Supplier credit is a commercial agreement between a buyer and a seller used in various settings, such as imports and exports, and in supplying goods and services to any business. The buyer receives the products and pledges to pay for them later under specific agreed terms and conditions.
In some cases, the buyer must pay a certain percentage upfront of the total cost of the goods. In other cases, payment for the entire amount can be deferred. Supplier credit is primarily based on trust, so sellers will only extend it to buyers who can prove themselves credit-worthy.
7. Peer-to-peer (P2P) lending
One of the most popular alternative methods of sourcing business capital is P2P lending. This model allows people to borrow from other individuals without the usual credit assessment procedures and time-consuming process. It’s like borrowing from a friend but with clear-cut terms and conditions about payment.
While entrepreneurs can find P2P investors everywhere, P2P websites are often the best places to look. You could find individual investors and institutions like hedge funds, life insurance companies, and banks. When lending through a P2P website or agency, these institutions must follow the rules of P2P lending like any other individual investor.
8. Revenue-based financing
In revenue-based financing, the entrepreneur or company pledges to pay a percentage of their future revenues for the borrowed money. In short, the investor gets a predetermined share of the business income until the loan is repaid.
The borrower typically pays up to three to five times the principal investment, but no fixed payments will be made over a fixed period. Revenue-based financing is based on the business’s performance, so the payments will vary according to the generated income. For this reason, investors can be very prudent when financing during a recession.
9. Line of credit
A business line of credit offers business owners cash up to a specific limit where you only pay back the interest, not the total amount loaned. Some lines of credit come with expiration dates, while others automatically renew each time the total amount is repaid.
Business lines of credit are often used as a cushion for short-term financial needs, such as buying inventory or supplementing cash flow. They work like term loans, designed for more significant purchases like trucks or buildings, but usually with higher interest rates.
10. Asset-based lending
Asset-based lending involves loaning money in exchange for a property that serves as collateral. This property can be commercial equipment, accounts receivable, or any other asset the borrower owns. The terms and conditions of an asset loan depend on the type and value of the property provided as security.
Photo by Razvan Chisu on Unsplash
Lenders generally prefer liquid collateral like securities, which they can readily convert into cash if the borrower defaults on the payments. Physical assets are riskier and will likely be considered for a lower loan amount.
Life and business go on
A recession is generally not the best time to raise business capital, but in some cases, it can even be ideal. In a crowded industry, for instance, the market becomes more vulnerable to a new player as existing competitors struggle to survive. Angel investors may also be looking for potential projects to bring their money out of the volatile stock market and into a promising, more tangible venture.
In any case, businesses have made valuable contributions to society since the early sixth century in ancient Greece. Clearly, not even a recession can stop its wheels from turning, including the vital role played by creditors and investors.