Top 5 Best Alternative Funding Options for Startups You Should Know About

In today’s cash-strapped and cost-conscious world, investors are looking for the next big thing and startups need capital to grow. In order to get startup capital, you need to come up with a solid business plan, demonstrate a real need for your product, and present it in an exciting way that investors will want to invest their money in.

While venture capitalists are eager to put their money into startups that have promising growth potential and a bright future, they’re not willing to give funding just to anyone.

However, this doesn’t mean you should give up on your new company idea or look for alternative funding options. These alternative financing options don’t have the same restrictions as conventional lending, which means you can get access to more capital from them than from banks and other traditional sources of capital.

In this article, we will discuss some of the most popular alternative financing options that may be useful for your startup.

What Are Alternative Funding Options for Startups?

Alternative funding options are financing sources that are not traditional venture capital. They include debt financing, equity crowdfunding, and peer-to-peer (P2P) lending.

These are all ways to raise money for your business that are often less conventional, and less known, than traditional equity-financed acquisitions.

While venture capitalists are eager to put their money into startups that have promising growth potential and a bright future, they’re not willing to give funding just to anyone. If you don’t meet certain criteria, they won’t invest in your company.

Read this article to know more about how you can successfully land venture capital investment.

If you have had trouble getting VC investment or loans in the past, have bad credit, or are unclear of how much cash your company actually needs, you might want to look into some of these alternative funding options, many of which are available online.

However, it can be challenging to comprehend and use your alternative funding options. The top 5 alternative financing solutions are explained here to assist you in locating the finest funding for your need.

1. peer-to-peer (P2P) lending

Peer-to-peer (P2P) lending is a relatively new way to fund startups. It’s similar to lending money to a friend or family member. Instead of going through a bank or microloan company, you connect investors with borrowers.

Investors put money up as a loan, and the borrower pays interest to the investor. Unlike banks, which offer fairly conservative loan amounts, P2P lending is much more flexible.

One popular online platform, Lending Club, lets you choose the loan amount and interest rate you’d like to pay. You can even collect interest on the loan and pay it back to your investors.

Depending on the platform you use, you may be able to fund multiple loans each month and earn a modest return on each loan you make. This type of funding typically benefits established businesses looking to expand and typically necessitates a thorough pitch deck to demonstrate.

A few other leading P2P lending platforms include: Funding Circle (US-based), Prosper (US-based), Peerberry (EU-based) and RoboCash (EU-based).

2. Equity Crowdfunding

Equity crowdfunding, as one of the most popular alternative funding options, is a way for individuals to invest in startups. With equity crowdfunding, investors purchase shares of a business’s ownership.

In exchange for equity, equity crowdfunding is a system that lets big groups of investors finance start-up enterprises and small businesses. Crowdfunders may put as little as $500 or as much as $50,000 into the campaign. The campaign organizer uses the money to fund their company.

When the campaign ends, the investors get shares of ownership in the company. There are plenty of equity crowdfunding tools that allow investors to raise money for businesses and individuals. Typically, these companies are looking for investors who are looking for a return on their investment.

In exchange for their financial support of a company, investors are given a small stake in that company. If a business is successful, both its value and the value of a stake in that business increase. The inverse is also true.

The most prominent equity crowdfunding platforms include AngelList, Fundable, MicroVentures and EquityNet.

3. ICOs (Initial Coin Offerings)

ICO stands for Initial Coin Offerings. It is a relatively new way to fund startups. In an ICO, entrepreneurs create “tokens” that are sold to investors during an initial coin offering.

The tokens could then be used to fund the company. Typically, ICOs are done as crowdfunding campaigns on blockchain platforms like Ethereum.

Investors purchase tokens, which then get automatically transferred to the campaign organizer’s Ethereum wallet after the campaign ends. This type of financing is more controversial than the other options on this list, as it is mostly unregulated.

On the other hand, through ICO, Startups may be able to sidestep rules that limit them from soliciting investment from the general public directly, as well as middlemen like venture capitalists, banks, and stock exchanges who may demand more scrutiny and a cut of future earnings or joint ownership.

There is a legitimate debate about whether ICOs are a legitimate source of funding for startups or a fraudulent investment scheme. So you have to be very careful with this alternative.

4. Grants

Many startups turn to grants to fund their ideas as one of the most important alternative funding options. There are different types of grants: state Grants, Federal Grants, and private grants.

• State grants are typically funded by public-private partnerships. The goal of these grants is to get ideas into the marketplace as quickly as possible for positive social impact.
• Federal grants are also designed to spur innovation and come from a variety of government agencies. Unlike state grants, federal grant funding is often competitive and awarded on a competitive basis.
• Private grants are typically a donation to your organization. You may have to provide some sort of collateral or guarantee that you will follow through with the grant.

Regardless of the grant source, you need to show that you have already done your research and put a lot of time and effort into finding grants. Prior research has suggested that obtaining a grant can increase the chances of landing VC funding and future growth of your startup.

In this article, we list top 10 most prestigious grants for startups and how to apply for them.

5. Debt Financing

Debt financing is a loan that typically comes with a rather high-interest rate. This type of financing is typically only available when you have a strong track record of paying back previous loans.

Typically, you must have a fully developed product and proven business model before you approach a lender for debt financing. Once you have a good idea of how much you need, you can start the process of finding debt financing sources.

These loans have been set aside exclusively for startups and small businesses. For businesses that are just beginning to navigate their financial needs, they typically also provide more enticing terms and less harsh penalties.

There are many different ways to find debt financing. You can contact banks, financial institutions, and investment companies that work with debt financing. You can also look online for online financing sources.

Bank loans, loans from loved ones, government-backed loans like SBA loans, lines of credit, credit cards, mortgages, and equipment loans are all examples of debt financing.

Final words

The truth is that there are superior alternatives to VC finance if you want to launch your business. The majority of businesses may succeed without early venture capital backing.

Many entrepreneurs and startups are discovering methods to succeed given the lean startup methodology now that it has gained traction. Therefore, think about these alternative funding sources first before spending any time looking up venture capitalists or preparing your company plan.

They include peer-to-peer lending, equity crowdfunding, ICOs (initial coin offerings), grants, and debt financing.