Alternative sources of business capital other than bank loans
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Other than design and marketing, there are many other things to be taken into consideration in running a creativity-based company, such as financial management and capital. Unfortunately, these two aspects are oftentimes ignored in businesses related to the creative field.
In general, companies were started by means of bootstrapping or private investment, followed by bank loans. However, business players need to know that there are alternative sources of business capital that they can take, whether in large or small amount. The planned capital must also be adjusted with the capacity and the development stage of the company.
Before looking for funding, business owners must prepare several things, namely business planning, business projections and financial projections. These three aspects are necessary so that they can describe the future state of the company to potential investors, and how the funding will be used to achieve the goals. The following are funding sources that can be alternative for business owners:
Crowdfunding
This method of fundraising is well-known in its sector and has famous public sites, such as StartEngine, Kickstarter, GoFundMe and Patreon. Crowdfunding is one of fundraising methods to fund businesses directly from the public through an online platform. Generally, crowdfunding is used by businesses that are still small in scale and have just had an initial idea or prototype for a product.
The company founder will present the product idea and features that make the product unique, as well as opening opportunities for the public to provide capitals. The capital raised through this system will later be used to develop the product they have presented. In exchange for the investment, some companies provide equity in their business, while some will send the finished products to their investors.
For beginners, crowdfunding is attractive because of the flexible investment and payment system. It can also increase hype and public awareness of startup products even before the products are made.
On the other hand, investors also have the flexibility in the investment mechanism. One of which is if the funding target is not achieved, investors will get their money back and the product development project will be cancelled.
Equity crowdfunding
This fundraising can be used by SME to develop their business or project with a joint venture mechanism. Just like companies that have been listed on the stock exchange, the investment will be returned in the form of shares or ownership of the company’s equity. If the company grows and makes profit, investors can receive dividends.
According to POJK No.37/POJK.04/2018, stock offering in equity crowdfunding is done by the issuer to sell shares directly to investors through an online system.
As of September 2020, the Financial Services Authority (OJK) recorded that 111 SMEs have raised funds through this scheme. Equity crowdfunding platforms that have obtained license from the OJK are Santara and Bizhare.
Angel investor
As mentioned in our article about startup terminology, angel investors are individuals who invest the initial capital into a business. Anyone can be an angel investor. Angel investors usually consist of friends and family members who are invited by the business owner to become a shareholder in the early stages of the company.
P2P lending (Peer-to-peer lending)
This mechanism is similar to traditional bank loans, where company founders can apply for debt-based crowdfunding. The difference is the source of the funding: P2P lending raises funding directly from public investors. Usually, the funds will be raised through peer-to-peer lending websites. When applying for P2P lending, the debtor agrees to repay the principal amount as well as the interest within a predetermined period.
P2P lending offers attractive return of investment to investors through loan interest that is regularly paid. However, because the debt interest rate is fixed, investors are excluded from big profits if the company is growing rapidly or there is an acquisition. P2P lending also have a social appeal, as it often shares stories about debtors who have been assisted by the fund.
Some of P2P lending platforms in Indonesia that have been recognised by the OJK are Investree, KoinWorks, Uang Teman, Modalku and Danamas.
Incubation or acceleration programme
Incubation and acceleration programmes for startup companies are initiated by private and government institutions. In the incubator programme, startup business players will introduce their product and business model to the investors. After that, they will be given direction and guidance so that they can perfect the product development, receive training to market their products to the public domain, as well as getting guidance for business growth and funding.
An incubation programme usually lasts for six months or more because the programme organiser also accommodates startups companies that are still in the concept or idea stage. The acceleration programme only lasts for three months because the programme organiser only accommodates startups that already have products and business entities.
Incubator and accelerator providers in Indonesia include IDX Incubator, BNV Labs, Indigo Incubator and Google.
Private equity (PE)
Private equity (PE) is an investment company that raises funds from certain segments and focuses on investing the funds in private companies.
PE usually targets companies that already has a clear product and stable business performance.
One of the most popular move of PE is the acquisition of Supreme by Carlyle Group, one of the largest PEs in the world. In 2017, Carlyle bought 50% of stake in Supreme for $1 billion.
The company that houses Victoria’s Secret, L Brand, was set to be acquired for $525 million by Sycamore Partners, a PE that focuses on retail companies and consumer investments. However, both parties cancelled the plan in 2020 due to very challenging business conditions in that year.
Venture capital
Venture capital (VC) is a part of private equity that focuses on startups or on companies that still have great potential to keep on growing. Companies that receive investment from venture capital are generally given a long period for operational/operational funding of up to seven years. Within that period, the company will be given targets which must be achieved. If they are able to achieve those targets, they will have the opportunity to get even bigger funding in the future.
One of the investment mechanisms used by venture capital is ownership of the company’s shares or debt that can be converted into shares. However, company founders should note that the greater the share ownership of the VC, the greater their say in every strategic decision taken by the company.
Some of the common practices in VC investment are placing some of its members in managerial positions in the company, such as on the board of directors. This reduces the chances for the company to move according to the will of the founder.
One of the local brands that just secured funding from VC is Brodo.