For many businesses, obtaining a traditional bank loan is simply not in the cards. Perhaps a company needs quick access to cash and its credit is beyond repair. Or maybe scoring backing through a crowdfunding campaign is more aligned with a company's culture and marketing goals. There are countless reasons why a business might consider alternative types of financing. And there are many alternative options from which to choose. Finding the best fit will depend on the business' unique needs and the comfort level of the company's leadership where risk is concerned.
Crowdfunding is the process of raising capital by collecting small amounts of money from a large number of people, typically using the Internet as a medium. The popularity of crowdfunding has grown immensely recently, with Forbes reporting a jump from $16 billion crowdfunded in 2014 to $34 billion in 2015. While any type of business can initiate a crowdfunding campaign, those that offer a tangible, marketable product tend to be the most successful.
Platforms such as GoFundMe, Kickstarter, and Indiegogo have made it easy for entrepreneurs to start and build awareness of their crowdfunding efforts for a small fee (usually a percentage of the total earned). Because these platforms are online, the audience is truly limitless. In addition to securing financing, orchestrating a crowdfunding campaign also helps you market your business and acquire your first customers, all at once.
Unfortunately, the vast majority of crowdfunding campaigns fail. Since some platforms operate in an "all or nothing" fashion, if you do not reach your fundraising goal, you do not receive any of none the money pledged by hopeful investors. This can devastate a small business that has invested resources into planning for and marketing the campaign.
LINE OF CREDIT
A line of credit is a fixed amount of credit offered to a business by a lender. The amount is usually determined by the company's available collateral and credit history. A line of credit is different than a loan in that, instead of providing cash in a single lump sum, a business can draw against a total as needed.
A line of credit is more flexible than a loan, because it gives you the ability to have cash when you need it without paying interest. But, there is typically a small fee each time a business draws on its line of credit, and the interest rate is usually slightly higher and more variable than a loan.
VENTURE CAPITAL OR ANGEL INVESTOR
Venture capitalists and angel investors provide capital to businesses in high-risk situations. In exchange for financing, VCs and angel investors usually take ownership of a piece of the business' equity.
Though the loss of independence is a major downside to giving up equity, working with a VC or angel investor brings access to connections, networking, and expert advice that can help the business thrive.
Joining with a partner and selling part of the business is another option that involves giving up some control of the company. But, teaming up with a partner can bring in a new beneficial perspective to complement existing operations.
It's important when working in a partnership to ensure all parties have clear expectations of each other and proper legal documentation in place to protect all interests.
Factoring is a practice in which a business sells its invoices to a third-party financial company to collect upon in order to access cash more quickly. Factoring typically comes with a very steep fee, but it is a viable option for a business facing a cash flow emergency.
Merchant cash advances work in much the same way personal cash advances do. Cash advance providers offer businesses a lump sum payment in exchange for a percentage of their future credit card sales.
Like factoring, cash advances offer quick access to cash at the expense of a large fee. For some businesses with bad credit or no collateral, a cash advance is their only option if they need a large amount of cash to repair equipment or bail themselves out of an emergency when cash flow is tight.
WORKING CAPITAL LOANS
Working capital loans are different from traditional loans because they can only be used to cover day-to-day expenses like payroll and utility bills. Working capital loans are not for long-term investments like new manufacturing equipment or real estate purchases. These types of loans typically posses a shorter term than traditional loans, as well as higher interest rates. However, they can be beneficial to a business that just needs a quick boost of income to bridge a one-time gap in cash flow, since qualification requirements are less stringent than large bank loans.