How to find funding for non-traditional business

Mark Stapp, Special to The Republic | azcentral.com 4:29 p.m. MST February 1, 2016

"Money isn't the most important thing in life, but it's reasonably close to oxygen on the 'gotta have it' scale." -- Zig Ziglar

Everything requires capital, but not all capital is the same, and finding the right capital can be one of the hardest things to do in business. Great ideas and needed services often have trouble raising money, but entrepreneurs whose ideas are social- or community-focused, outside of the traditional, or implement new business structures face especially big challenges.

Benefit corporations and others that are not just profit-motivated are in this category. Created out of a desire to do good and do well, these entities focus on producing positive social and community impacts while at the same time making a profit. An increasing number of entrepreneurs are driven to create value not only for their companies, but also for their workers and communities. For them, success extends beyond profitability.

Communities seek this kind of locally grown, contextual, integrated business, but these businesses are emerging at the same time our banking system has changed as a result of the financial crisis. It's always been tough to get funds for these types of business, but regulatory changes have made securing needed capital considerably harder. Traditional bank loans and other sources of capital may not be right for your business or the underwriting may be too restrictive and not recognize benefits of the company beyond profit.

Fortunately, the emergence of crowdsource funding, social capital and peer-to-peer lending has opened up numerous sources of capital to support innovative, socially motivated and community-focused ventures. For example, the Lending Club connects borrowers and investors online. Funding Circle operates on the same model, specializing in small business. And Prosper is an example of an electronic peer-to-peer lending marketplace. But if you need significant sums to fund company expansion, you will need to look beyond these sources. Getting a bank loan, even a Small Business Administration loan, may be very difficult for many new businesses or small businesses, especially those with no real estate to offer as collateral.

You might consider approaching an organization that is a Community Development Financial Institution for funding. CDFIs are federally recognized, local organizations that focus on personal lending and business development efforts in their communities. The U.S. Department of the Treasury provides funds in partnership with a variety of private sector investors to inject money into communities that lack access to financing.

Another source is New Market Tax Credit funds. This is a federal program that uses tax credits to attract private investment in the economic development of low-income and underserved areas. The aim is to fund the renovation of real estate and to expand operating businesses. NMTC equity investments and/or loans benefit businesses by enabling them to obtain flexible debt or capital that otherwise may not be available in the marketplace. NMTC awards are issued by certified community development entities, which "trade" those credits for equity from private investors.

There are 17 CDFIs in Arizona, including several in the Phoenix metro area. If your business or intended project is providing economic development, employment and training, if you supply needed facilities to underserved areas or populations, and you are a mission driven, socially minded entity, you may find the financing you need through one of these organizations. It can be a complicated process and not like the experience you are used to when walking into a bank, but it might be your best solution.

These sources still utilize conventional underwriting processes, but have a specific mission to help local business and economies. A good business plan and a well-defined business model are critical for any business, but if you have these and have a mission that aligns with these capital providers, your chance of securing the needed capital is greatly improved.

"Getting Started" is an entrepreneurship column by faculty from the W.P. Carey School of Business at Arizona State University. Mark Stapp is the director of the Master of Real Estate Development program at the W. P. Carey School.

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