Available funding for businesses is changing, and the current state of the economy can make seeking and obtaining loans seem like a nightmare. If you’re struggling to get a bank loan, or you don’t like your current options, there are alternatives to traditional loans that are likely available to you.
What is alternative funding?
Simply put, alternative funding is gaining financing for your company outside of traditional bank loans to gain capital. Many of these alternative sources exist online, and you may consider pursuing this funding route if you’ve been turned down for loans in the past, have poor credit, or are unsure of how much funding you really need for your business.
But understanding and navigating your alternative funding options can be complicated. To help you find the best funding to fit your needs, read on for the top 8 alternative financing options.
1. Traditional loans
While you may be familiar with and looking to steer clear of traditional bank loans, there are still more attractive options offered to gain capital from banks. SBA and small business lending funds, for example, act as alternatives to typical bank loans.
These loans and funds are set aside specifically for small businesses and entrepreneurs. Typically, they also offer more attractive terms and less severe penalties which can be beneficial for startups that are just starting to navigate their financial needs. With these forms of loans, it is important that you have a solid business plan in place before applying.
A grant is financial assistance awarded by the federal, state, or local government. It is a specific amount of money given to an applicant who shows a promising chance of success.
Because grants are money being awarded rather than simply borrowed, they are much more competitive to receive. While they are difficult to acquire and oftentimes require specific circumstances, grants are incredibly valuable. If you’re pursuing a grant, government and SBA options are likely the most common but difficult routes to go. However, there are resources like NAV and the National Association for the Self-Employed that can help you discover more open options to help make a grant easier to acquire.
A recent emergence of financial technology lenders could serve as a beneficial alternative funding route. These lenders typically provide smaller loans, credit options, lower barriers to entry, and function solely online.
Some notable options include Kabbage and PayPal, but the trick is to do your research. Each option has it’s own set of benefits and limitations, which can mean fewer funds available, being tied to a specific lender long-term or even higher interest rates. With fintech, companies can benefit from expanding their finance options, automated accounting, online payments, and more.
Crowdfunding is another alternative source of funding that is typically beneficial for product launches. This avenue of financing is like launching a promo landing page to gauge interest; it’s a viable way to test the market.
Crowdfunding has several benefits, but if you’re interested in going this route it’s important to note that each crowdfunding site differs. Some only allow funding for a limited time, some require you to meet your goal to receive any funds and others serve as long-term community sites. Be sure to read the fine print to really understand that you may get all or nothing if going this route.
5. Peer-to-Peer lending
Peer-to-peer lending is also referred to as social lending which essentially allows individual people to borrow and lend money to and from one another. Think of it as a combination of crowdfunding, loans, and angel investment.
There are several online platforms that act as pitching services to connect you with investors for funds and insight or reach a community of like-minded individuals interested in investing. This form of funding tends to be more useful for established businesses that are looking to grow and typically requires a thorough pitch deck to showcase.
6. Venture Capital and Angel Investment
Venture capital or angel investments are individuals or firms that are willing to pump funds into startups. They are typically looking for a return (you would need an exit plan or growth plan) or a share of your business.
This kind of funding is very applicable for specific industries (ie. tech, medical, online) and usually require your business to be somewhat disruptive and primed for growth. If this route seems like a good option for you, then a solid business plan and pitch deck are vital here.
7. Pitch competitions
This is another unique funding option that is really primed for startups or those working within an incubator. Pitch competitions typically require you to be located within a specific region, be at a specific revenue stage, or be part of a cohort of entrepreneurs.
This form of funding is particularly beneficial for those with an established business looking to grow and is a great way to gain exposure for your business. Don’t be discouraged if you’re not a tech or medical startup. Depending on where you’re located, there are often regional or community-driven pitch contests that occur from time-to-time.
This traditional way of alternative funding basically consists of doing everything you can to acquire funding. While all of the options listed above are still viable, you will likely find yourself doing some sort of bootstrapping to prepare your business financially.
Consider funding from friends and family, service or product presales, using your savings or selling assets, and even looking into lines of credit. Bootstrapping is really something every business owner should do to help feel out the early stages of understanding how much funding you need to operate. It encourages lean operations and can help you avoid taking out too much funding early on.
No matter the funding be prepared with your business plan
Seeking funding for your business in the more traditional style of bank loans can be challenging, and these alternative funding options can help you save time and rejection along the way. No matter the funding options you choose, it’s important to have a solid business plan to back up your business and better your chances of acquiring funds.
You can download a professional and impressive business plan for free with our Business Plan Template. And if you’re looking for a simpler method that can help you with business planning, pitching, budgeting, forecasting, and performance tracking for your business, you may want to check out LivePlan.