Restaurants, laundromats, tech startups, and mechanics. Very different businesses—one common thread. They all need capital to survive and grow.
Now there are more ways to fund your business than ever—many of which require less time compiling papers or waiting on the bank. And even if you’re applying for more traditional funding sources, non-traditional funding options can be a big help in supplementing a loan or a credit line.
Here are the 5 most accessible non-traditional funding sources for small businesses at your disposal, and some best practices for scoring the capital you need.
What it is: If you’ve been on the internet at all in the last decade, you’ve seen crowdfunding campaigns. They’re how your niece raises money for her volunteer trip to Peru, or how the next, exciting ecommerce product plans its big launch.
Crowdfunding is growing at an exponential rate, and more money is invested through it than through venture capital. It offers a couple key advantages. For one, it can be a relatively inexpensive way to bankroll a new idea. But beyond that, soliciting a host of investors online has inherent marketing value. You’re both raising money for your business, and getting the word out about it.
Equity crowdfunding is another growing alternative—wherein you sell a small equity, or convertible debt stake in your company, to an internet of bidders.
Either way, crowdfunding is a simple, but not necessarily easy, way to fund, validate, or grow your business.
Funding potential: Right now, the average crowdfunding campaign yields $7,000. But the sky is really the limit. There are entire marketing and PR agencies now that focus exclusively on successful crowdfunding launches.
Who it’s right for: Different types of crowdfunding can help you meet different business goals.
If you have solid plans to grow and scale—equity crowdfunding might be a good bet. It’ll leave you with a solid group of investors, but also an increased sense of oversight. If you’re concerned about being beholden to shareholders, or weighed down by loans—crowdfunding based on rewards might be a better idea.
Certain types of products also lend themselves better to crowdfunding campaigns. Products that target consumers (B2C versus B2C) are a more natural fit for a crowdfunding campaign. Keeping your value proposition simple, your campaign description personal, and your images visually appealing can help your product stand out in a crowdfunding campaign.
In contrast to many types of funding, female entrepreneurs actually have greater success in crowdfunding campaigns than their male counterparts.
Crowdfunding platforms worth exploring:
- Kickstarter (Rewards)
- Indiegogo (Rewards)
- Republic (Equity)
- CircleUp (Equity)
- Crowdfunder (Equity)
- Fundable (Rewards or Equity)
2. Peer-to-Peer (P2P) lending
What it is: Peer-to-peer lending offers an opportunity for loans that cut out the middleman. Lending arrangements are often thought of as “non-bank banking,” and are determined online.
Funding through P2P lending tends to move a lot faster than traditional banks, turning around an investment in as little as three days. But they aren’t totally devoid of bureaucracy. Sites link with third party platforms to validate your credit score.
P2P lending offers advantages to both investors and business owners. On average, they offer less volatility and higher returns than stock markets. And for entrepreneurs seeking funding, cutting out bank fees usually yields better terms.
Funding potential: Most P2P lending platforms allow for personal loans of up to $35,000. They’re generally fixed rate, and unsecured—at interest rates just shy of 7% and up to 36%. There are, however, some outliers—with certain platforms allowing for up to $500,000 of funding.
Who it’s right for: If you need to kickstart a business on a deadline, P2P lending offers a quick way to fill a funding gap.
Unlike traditional small business loans, P2P lending sites don’t require you report the intricate details of how you’ll use the funds, or what your books look like. You’ll want to have a credit score, though, of 640 or higher. That, your loan amount, and your loan term, are all factors into determining your final interest rate.
Peer-to-peer lending platforms worth exploring:
What it is: Microfinance is more or less what it sounds like: small investments that add up to a fuller funding strategy. Funding from both grants and loans can fall under this umbrella.
Microfinance loans are similar to P2P loans in that they’re non-bank funding you pay back over time. And they’re similar to crowdfunding campaigns in that individual lenders can contribute as little as $25. Microfinance grants are awarded to qualifying businesses—usually to bolster social cause based ventures, or to support underrepresented groups.
Though microloans have been popular abroad for years, the field is just emerging in the US. But there’s a growing number of non-profit microlenders and initiatives emerging to help small business owners fill funding gaps, improve their credit, and invest in growth. The Small Business Administration also sponsors a full docket of micro-grant and loan opportunities.
Funding potential: True to its name, you won’t be granted millions from microloans. Most loans and grants are for $50,000 or less, and some are for as little as $1,500.
Who’s it for: Microloans are frequently, but not always, mission focused. Those that are, are often set aside for businesses that bolster disadvantaged communities, or are women or minority owned. Some may help certain business owners meet specific objectives (ie. buy supplies) or work with entrepreneurs within a certain household income. They’re often coupled with educational opportunities—like workshops or mentorships offered free to recipients,
Micro-lending platforms and programs worth exploring:
- Kiva U.S.
- Pacific Community Ventures
- Excelsior Growth Fund
- Business Center for New Americans
- SBA Microloan Program
- SBA Community Advantage Program
4. Accelerators and incubators
What they are: Accelerators and incubators are similar in nature, but are built for different segments of the business lifecycle. Accelerators help to scale businesses that have some of the foundations in place. Incubators help refine a business idea, and begin to build. Both (often) offer funding that comes with perks and strings.
Unlike than loans or grants—incubators and accelerators function more as startup packages. In addition to seed capital and opportunities to meet with investors and mentors—they offer tangible resources, like workspaces and IT services.
Funding Potential: Funding can vary wildly, based on the size of the accelerator or incubator. Big incubators, like Y Combinator, guarantee funding of $150,000 for each startup. Some incubators offer no initial funding–providing only resources.
Who it’s good for: Startups with novel, “blue ocean” ideas and high growth potential are the best candidates for accelerators and incubators. Top programs are often highly competitive—so having a business idea that stands out to investors is pivotal. There are plenty of local programs—often run by universities—which are more accessible.
Places to look for accelerators/incubators:
Here’s a directory of 400+ accelerators/incubators in North America to get you started.
What it is: Factoring grants your business funding based on their incoming funds. For example, if you’ve set your invoice and are set to receive $20,000 in the next 60 days—a factorer will give you an advance, then collect funds directly from customers.
Technically, you’re selling your business’s account receivables to a third party for a discount. They pay you upfront, and then collect your customer’s payment. This saves you the stress of collecting from late-paying customers and gets you a cash advance.
Funding potential: Factoring companies buy your recievables at varying rates—generally anywhere from 50-90% of your total invoice value. Some lendors will also charge a small processing fee, or a factor fee.
Who it’s good for: If your startup runs into short-term cash flow problems, factoring might gain you the stability you need to grow reliably. One note to be weary of: factorers look at the credit and reliability of your customers and clients, rather than evaluating your credit-worthiness. Factoring may only be a good option if the people you work with appear trustworthy.
Factoring platforms worth exploring:
Summing it all up: non-traditional funding for your small business
It’s a great time to be looking to start a small business. We no longer live in the era of walking down to the local bank and speaking to the manager about getting a loan. There are more options than ever for non-traditional funding for small businesses. It’s simply about knowing where to look for them.
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