6 Alternative Financing Methods for Startups
One of the biggest challenges startups face is securing the funds they need to get their business up and running. Banks are the conventional choice for funding, but there are alternative options that may offer more flexibility and freedom.
Here are six alternative financing options for startups.
1. Community Development Finance Institutions
Community development finance institutions (CDFI) are non-profit organizations that provide capital to small and micro-businesses with reasonable terms.
CDFIs differ from conventional banks in many ways. These lenders look at credit scores, but they look at them in a different way. Unfortunate things happen to good businesses and people, and these events can impact accounting in a negative way. CDFIs assess relevance when looking at credit scores to understand what happened. If a medical issue or job loss was the issue, credit issues may be overlooked.
CDFI lenders also do not require as much collateral as a traditional bank.
2. Merchant Cash Advance
Think of a merchant cash advance as a pay back as you earn option. Businesses can qualify for up to 100% of their average monthly card transactions in funding, and repayment is automatically collected from future debit/credit card sales. There is no fixed term or monthly payment.
A merchant cash advance may be a good option for startups that are already making sales and need more cash to expand or move on to the next phase of its launch.
3. Angel Investors
Angel investors take a greater interest in the companies they invest in. These are investors with a lot of capital, and they may be interested in an equity stake in your startup.
Along with providing funds, angel investors may also guide and assist you along the way. After all, it’s in their best interest for your startup to succeed. Their experience and expertise can help save you money in the long run while improving on your operations.
There are several grants available to startups that are focused on science or research. The great thing about grants is that you don’t have to pay them back.
The Small Business Administration (SBA) offers grants through the Small Business Technology Transfer (SBTT) and Small Business Innovation Research (SBIR) programs. Companies that receive these grants are required to meet certain research and development goals, and they must have a high potential for commercialization.
With factoring, lenders provide an advance on money owed in unpaid invoices. When the customer settles the bill, the borrower repays the funds.
Factoring allows a business to continue with its operations while waiting for customers to pay their outstanding invoices. This allows businesses to take on new projects more quickly and/or maintain a steady cash flow.
6. Venture Capitalists
Venture capitalists are companies that take part ownership of a startup in exchange for capital. The percentage of ownership can be negotiated and is typically based on the company’s valuation.
Venture capital (VC) may be a good option for a startup if the company has high growth potential and a competitive edge, such as a patent.
In addition to capital, a VC firm may also provide hands-on assistance from its network of advisors and accelerators.