4 Alternative Methods to Fund Your Startup
While a great business plan is crucial for the success of your startup, financing is one of the most important elements a company needs to succeed. After all, money is the bloodline of any business. However, looking for an investor to fund your startup can be an intricate and delicate process, especially for new entrepreneurs with poor credit history.
While there is no minimum credit score to get a business loan, traditional lenders have a range they usually consider acceptable. At almost every stage of the business, entrepreneurs find themselves asking questions like “how do I finance my startup,” or “can I fund my startup without an investor.” Now, funding depends mainly on the nature and type of the business; if it does not qualify for a traditional bank loan, there are alternative methods to meet your needs.
Alternative financing is any method through which business owners can acquire capital without the assistance of traditional banks. Options such as crowdfunding, online loan providers, and cryptocurrency qualify as alternative financing.
In this article, we break down four funding options, examine the benefits of alternative lending and provide tips on financing your business.
Community Development Finance Institutions (CDFIs)
CDFIs are financial institutions that lend to: “businesses and people who struggle to get finance from high street banks”, according to a recent PwC report. They are social enterprises that invest in customers and communities. There are over 50 CDFIs across the UK, and since the 2009 recession, they have lent over £1B to their communities, creating and safeguarding over 66,000 jobs, 28,000 businesses, thousands of social enterprises, and saving 150,000 individuals from becoming trapped in a cycle of indebtedness with high-cost credit providers.
Because of their social mission, CDFIs consider credit scores differently from traditional lenders. CDFI’s focus is on understanding the individual or business with an emphasis on determining the customer’s viability. CDFIs will provide formal and informal technical assistance support throughout the application process, such as financial training, mentoring, and advice, to help the client develop their business or personal financial position before applying for finance. CDFIs are not deposit-based as their funding is secured from various sources—loans from commercial and social lenders, grants from the government, trusts and foundations, equity from shareholders, and funds they manage on behalf of third parties.
This makes them the perfect choice for young entrepreneurs with no or poor credit history, from low-income backgrounds, who are not in employment or education, and those from ethnic minority groups, otherwise excluded from mainstream funding.
Venture Capitalists (VCs)
VCs are an outside group that takes part in the company in exchange for capital. The percentages of ownership to capital are negotiable and usually based on a company’s valuation. VCs provide expertise and mentorship and act as a litmus test of the organization’s goals, evaluating the business from sustainability and scalability. A venture capital investment may be appropriate for small businesses beyond the startup phase and already generating revenues.
However, there are a few downsides to using VCs. First, VCs have a short leash regarding company loyalty and often look to recover their investment within three to five years. If you have a product taking longer than that to get to market, then venture-capital investors may not be very interested in you. They also typically look for more extensive opportunities that are a little bit more stable, companies having a solid team of people and good traction.
This method targets (potential) consumers that will fund your business. There are 2 main types of crowdfunding:
- Donation-based: This is the preferred way for NGOs. They mostly rely on donations to finance their activities.
- Lending or equity crowdfunding: This is based on the idea that you give away a stake in your company in exchange for funding. This means you can raise large amounts, but you’ll need to disclose lots of information about your business and be careful about how much of your company you give away.
Government research grants
If your research falls within disciplines such as astronomy, physics, chemistry and engineering, social sciences, economics, environmental sciences, and the arts and humanities, you can be eligible for UK Research and Innovation (UKRI) funding. For example, if your research is on cyber resilience, science, space, weapons, or energetics, you can be eligible for a Defence Science and Technology Laboratory (Dstl) grant.
How can you prepare to apply for alternative lending options?
- Know how much you need to borrow upfront: When you apply for business loan alternatives, you’ll likely find many different loan amounts available. Don’t commit to borrowing more than you need; there may be penalties for early repayment or not using your whole loan.
- Write a business plan with financial projections: While not all alternative financing providers will demand to see your business plan, many funding sources have this stipulation, so you should prepare your plan now.
- Do market research and know the conditions of your industry: Lenders may be more likely to approve borrowers in growing industries. If you can prove that your company’s sector or market primes your business to expand and succeed, present your argument firmly somewhere in your application.
- Know your credit score: Often, a credit score below a certain number is an immediate disqualifier for loan applications, even if your idea has potential. If your credit score is too low, work to improve it before seeking capital.
Raising money is tough, so make sure you stay motivated. This is the backbone of your business’s success.