Alternative Funding Strategies: Fueling Your Business Growth

For many new business owners, traditional funding may be out of reach when looking for a business loan. Traditional lenders typically won't lend to small businesses with bad credit, no assets, or a lack of industry experience. Fortunately, there are many new alternative funding sources available. Learn how to find alternative funding for your business idea, including alternative business lending, self-funded strategies, and alternative funding programs that don't have to be repaid.

Looking For a Business Loan? Prepare Your Personal Finances

You are your business: That means financially, your business life and personal life are connected. So, ideally, before you start looking to secure working capital for your business, you need to have your personal finance ducks in a row.

Your first step before applying for traditional or alternative funding should be to build your personal credit to have the best credit score possible. Higher credit scores lead to the best interest rates and terms, and they can unlock specific loan programs for small businesses in the early stages of growth. If you haven’t already, pay off debt, make all payments on time, and maintain low credit card balances.

Alternative Financing Options for Entrepreneurs

Traditionally, new businesses would look toward traditional banks for a conventional business loan. While this is a valid option, entrepreneurs can sometimes find it difficult to get bank financing – especially if they don’t have collateral or strong personal credit.

Banks focus on the least risky investments to preserve their customers' deposits. This means that startups, early stage businesses, and businesses with inconsistent cash flow may have trouble getting approved. But the good news is that banks and conventional business loans are not your only option anymore. Alternative funding programs can also help you secure the money you need to grow your business and reach your goals.

Personal Investment

Many entrepreneurs opt to finance their company using their own resources such as home equity, personal savings, 401(k), credit cards, or even the operating revenue of the new company.

The clear pro is that you don't have to take on debt or give up equity since you're using your own money. Without investors, you have complete autonomy in running your business. Having complete ownership allows you to take calculated risks that might not be an option if you have to answer to investors.

The clear downside is that using your own money means you run the risk of wiping out your savings or personal credit. You must also be diligent with your budget and constantly focus on generating revenue to finance your business. This can lead to short-term decisions that are counter to your long-term strategy.

If you have a solid plan and the drive to stay on task financially, then using your own resources in the beginning may be the best strategy.

Friends and Family

Asking friends and family for funding can be a tricky situation for some. If you plan on going this route as an alternative funding method, it’s strongly advised to have clear documentation and agreements to avoid any issues with repayment.

Angel Investing

Angel investors come in all shapes and sizes and are sometimes a primary funding source for many startups. What they have in common is that they are all individual investors with money they want to invest in your business. Typically, angels will invest anywhere from $25,000 to $100,000.

In addition to providing alternative business financing, they also offer advice and introductions to networks that benefit entrepreneurs. Angel investors want your company to succeed, so they have a vested interest in contributing their talents, advice, and network.

Venture Capital

Venture capitalists (VCs) are investors who finance startups with great potential for a high rate of return. They assume part ownership in the company in exchange for capital. These alternative funding investors may be individuals or other financial institutions.

VCs tend to invest at the early stage when your business is showing promise. Once they’ve seen you succeed with one small business, they are more likely to invest in you again.

Since VCs want to see healthy profits, they often add value to your business through non-financial means. This may include advantages such as access to their advisors, introducing you to potential customers or vendors, and other resources.

Government Grants and Subsidies

This is considered the “holy grail” of alternative funding. You don’t have to pay these back. Getting one of these government grants could give your business a healthy dose of free money. The trick is finding one that suits your company.

Once you’ve confirmed that your company fits the requirements, you fill out an application. These grants are often quite competitive – you will go up against other companies trying for that same money. There are both federal grants and corporate grants for you to consider.

Crowdfunding

In recent years, numerous small businesses have started raising money online via social media and dedicated crowdfunding platforms like Kickstarter and Indiegogo. You use these peer lending networks to reach out to friends, family, and individual investors for alternative business loans instead of going down to your local bank. This type of fundraising campaign allows your network to help grow your business with an amount that works for them.

There are three basic types of crowdfunding platforms: donation based, reward based, and equity based.

• Donation based platforms are exactly what they sound like – contributors donate without looking for anything in return. These alternative funding payments tend to be made with smaller donations, but they can add up to large sums of money if enough people support your cause.
• Reward based platforms offer backers some swag or experience in return for their contributions. This reward is often what is being produced, maybe a product sample or a video.
• Equity based platforms give investors equity in the company, usually in exchange for larger amounts of money.

As with all contracts, read the fine print. Every platform has different requirements. Some have payment processing fees or per-transaction charges. Some platforms are “all or nothing,” meaning that you don't get any funding if you don’t reach your goal.

Merchant Cash Advance

Factoring can be an excellent alternative funding option for businesses with ongoing revenues. Alternative lenders offer quick funding that's backed by future credit card receipts, customer invoices, or purchase orders.

As your business grows and your credit score increases, you can evaluate other funding methods that may offer lower interest rates and long-term repayment schedules.

The Bottom Line About Alternative Funding

Looking beyond conventional business loans – and including conventional business loans – you have an array of funding choices available to your business. Financing comes in many forms. Find the best one for you.

Frequently Asked Questions (FAQs)

What does alternative funding mean?

Alternative funding allows business owners to access debt and equity funding outside traditional bank channels. These lenders are often backed by private investors, hedge funds, and private equity firms rather than publicly traded companies.

How does alternative funding work?

Alternative lending is a loan or line of credit offered by a non-bank lender. These alternative funding companies have streamlined the lending process to offer quick decisions and fast funding. Since alternative lending tends to be riskier than conventional loans, they often have higher interest rates and fees than a traditional lender.

How do I choose among alternative financing options?

Business owners can choose between two forms of debt funding when borrowing from alternative lenders, depending on the needs of the business. A target="_blank"term loan provides a lump sum of money with fixed monthly payments for a set time and a fixed interest rate throughout the loan term. Lines of credit offer flexible financing with interest-only payments during the draw period and a maximum borrowing capacity that can be used repeatedly as the borrower pays down its balance.

What are the advantages and disadvantages of alternative funding?

Alternative lending appeals to entrepreneurs because it generally has a quick and easy approval process with fast funding. The downside is that alternative loans usually come with higher rates, and the loan terms may be shorter than traditional bank loans, resulting in higher monthly payments.

What are the three main types of business funding?

There are three primary ways to get money to run your business – retained earnings from profits, acquiring debt, or equity investments. Retained earnings are the profits you keep in the business to fund working capital and expansion, while equity investments are the money owners and investors feed into the business. Debt has many forms, including loans from traditional lenders and alternative lending from non-bank sources.

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