Funding Dreams: Alternative Financing for Businesses
Owners of startups and small businesses that are relatively new often face challenges in obtaining business funding. They typically lack credit profiles demonstrating their ability to repay borrowed funds and don't have an established history of revenue and growth. However, there are alternative financing options available that do not require these qualifications.
If you're an aspiring entrepreneur looking to make your business dream a reality, or you have already started a business and need growth capital, keep reading this Ameris Bank blog article. In it, we explain alternative financing and provide an overview of six popular types.
Alternative financing, as the term implies, refers to funding sources and products that exist outside of traditional banking and financial institutions. This approach to financing is beneficial for business owners who are in the process of building their business credit and establishing a payment and revenue history.
Alternative financing can help sustain a business in its early stages and position the owner to secure more favorable rates and terms when they eventually seek traditional financing from a bank, such as an SBA loan.
Many entrepreneurs get their business idea off the ground through self-funding, also known as bootstrapping. Self-funding enables owners to maintain full control over the business since they use their financial resources to launch it. This eliminates the need to take out a business loan or transfer equity to investors who provide startup funding.
Self-funding is ideal for startups requiring a small amount of capital while ensuring the owner's savings remain intact. Conversely, self-funding a startup in a capital-intensive industry can be challenging. Certain sectors require high initial investments in equipment, machinery, technology, vehicles, and commercial or retail space.
Self-funding sources include personal savings, financial support from family members, and retirement accounts. Considering the potential fees and penalties associated with early withdrawals from retirement accounts is very important, so business owners should discuss this with a bank representative. One viable option for accessing funds is a Rollover for Business Startups (ROBS), which allows business owners to use a portion of their 401(k) funds for their business without incurring taxes or early withdrawal penalties.
Crowdfunding gives entrepreneurs an opportunity to raise money for their startup from a pool of investors. This can involve presenting the business idea to family members, friends, and neighbors and requesting financial support to help launch the business.
Crowdfunding can also occur online, opening the doors to more potential investors. It requires opening an account on a crowdfunding website like Kickstarter, Indiegogo, or CrowdFunder and creating a campaign. Crowdfunding websites connect entrepreneurs with potential investors who can review the campaign and decide if they wish to contribute financially.
The main types of crowdfunding are equity-based, rewards-based, and donation-based. In equity-based crowdfunding, the investors receive a portion of the business's equity (i.e., a share of future profits) in exchange for financial support. In rewards-based crowdfunding, contributors get something unique for their investment, such as a free product or service or a special discount. Lastly, donation-based crowdfunding is used by small businesses and nonprofits that seek funding for social and community-based projects and causes.
Angel investors help startup businesses launch by giving the founders early-stage funding, often in exchange for a percentage of equity. Angel investors can be friends, family members, or affluent individuals with experience in specific business industries. Professional angel investors also work with new businesses in the pre-launch phase.
Having one or several angel investors can be a game-changer for startups. By injecting funds into businesses at the beginning of their journey, angel investors enable these companies to develop their products or services and ultimately go to market. Some angel investors work behind the scenes and offer only financial support, while others provide guidance and recommendations to help entrepreneurs succeed and avoid common pitfalls.
A business grant is a financial award in the form of funding given to eligible businesses. A grant typically does not require repayment, nor does it involve exchanging business equity, which benefits the grant recipient. Many types of grant programs are available for small businesses nationwide. The Grants.gov website lists over 1,000 grant programs across federal grant-making agencies, awarding businesses more than $500 billion each year.1
In addition to federal grants, there are local and state-level grants, as well as grants from publicly traded companies, private companies, and nonprofit organizations. When seeking grants that align with their business goals, entrepreneurs can narrow their search based on industry, demographics, or sustainability initiatives. The options are abundant.
By reviewing the eligibility requirements, entrepreneurs will determine if their business qualifies for a particular grant. The final step is to apply for a grant, which is straightforward but may require extensive paperwork and business documentation (e.g., a grant proposal, business plan, and financial statements).
Small businesses that experience fluctuations in cash flow might face periods without adequate capital to cover operational costs. Managing day-to-day operations, paying bills, and seizing potential growth opportunities during these times can be difficult. Invoice factoring is an alternative financing option that can help businesses weather a downturn.
With invoice factoring, a business sells its unpaid invoices to a lender or factoring company at a discounted rate. Then, the lender or factoring company provides the business with an influx of cash by advancing a portion of the total value of the unpaid invoices, usually 70% to 85%. When customers/clients pay their outstanding invoices, the business repays the lender or factoring company minus any applicable fees or interest.
A business line of credit lets business owners access funds as needed, up to an approved limit, from a business checking account. Interest is only paid on the amount borrowed, making it an efficient way for business owners to manage their company's cash flow, cover unexpected expenses, or finance short-term costs.
Business owners can select between two types of business lines of credit based on their needs and the offerings of their bank or lender: a revolving line of credit and a non-revolving line of credit. A revolving credit line, like the unsecured Business Xpress Line of Credit offered by Ameris Bank, replenishes once the borrowed amount is repaid, which provides ongoing access to funds. On the other hand, a non-revolving credit line offers a fixed amount of credit that can be used only once—the account closes once all funds are accessed and repaid.
Are you looking for more tips on financing, running, and growing your small business? Visit our business blog to access feature-filled articles that cover these and other topics.
1 https://www.grants.gov/support/about-grants-gov.html
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ameris Bank is not affiliated with nor endorses Kickstarter, Indiegogo, CrowdFunder, or Grants.gov.
If you're an aspiring entrepreneur looking to make your business dream a reality, or you have already started a business and need growth capital, keep reading this Ameris Bank blog article. In it, we explain alternative financing and provide an overview of six popular types.
What is Alternative Financing?
Alternative financing, as the term implies, refers to funding sources and products that exist outside of traditional banking and financial institutions. This approach to financing is beneficial for business owners who are in the process of building their business credit and establishing a payment and revenue history.Alternative financing can help sustain a business in its early stages and position the owner to secure more favorable rates and terms when they eventually seek traditional financing from a bank, such as an SBA loan.
Self-Funding
Many entrepreneurs get their business idea off the ground through self-funding, also known as bootstrapping. Self-funding enables owners to maintain full control over the business since they use their financial resources to launch it. This eliminates the need to take out a business loan or transfer equity to investors who provide startup funding.Self-funding is ideal for startups requiring a small amount of capital while ensuring the owner's savings remain intact. Conversely, self-funding a startup in a capital-intensive industry can be challenging. Certain sectors require high initial investments in equipment, machinery, technology, vehicles, and commercial or retail space.
Self-funding sources include personal savings, financial support from family members, and retirement accounts. Considering the potential fees and penalties associated with early withdrawals from retirement accounts is very important, so business owners should discuss this with a bank representative. One viable option for accessing funds is a Rollover for Business Startups (ROBS), which allows business owners to use a portion of their 401(k) funds for their business without incurring taxes or early withdrawal penalties.
Crowdfunding
Crowdfunding gives entrepreneurs an opportunity to raise money for their startup from a pool of investors. This can involve presenting the business idea to family members, friends, and neighbors and requesting financial support to help launch the business.Crowdfunding can also occur online, opening the doors to more potential investors. It requires opening an account on a crowdfunding website like Kickstarter, Indiegogo, or CrowdFunder and creating a campaign. Crowdfunding websites connect entrepreneurs with potential investors who can review the campaign and decide if they wish to contribute financially.
The main types of crowdfunding are equity-based, rewards-based, and donation-based. In equity-based crowdfunding, the investors receive a portion of the business's equity (i.e., a share of future profits) in exchange for financial support. In rewards-based crowdfunding, contributors get something unique for their investment, such as a free product or service or a special discount. Lastly, donation-based crowdfunding is used by small businesses and nonprofits that seek funding for social and community-based projects and causes.
Angel Investors
Angel investors help startup businesses launch by giving the founders early-stage funding, often in exchange for a percentage of equity. Angel investors can be friends, family members, or affluent individuals with experience in specific business industries. Professional angel investors also work with new businesses in the pre-launch phase.Having one or several angel investors can be a game-changer for startups. By injecting funds into businesses at the beginning of their journey, angel investors enable these companies to develop their products or services and ultimately go to market. Some angel investors work behind the scenes and offer only financial support, while others provide guidance and recommendations to help entrepreneurs succeed and avoid common pitfalls.
Grants
A business grant is a financial award in the form of funding given to eligible businesses. A grant typically does not require repayment, nor does it involve exchanging business equity, which benefits the grant recipient. Many types of grant programs are available for small businesses nationwide. The Grants.gov website lists over 1,000 grant programs across federal grant-making agencies, awarding businesses more than $500 billion each year.1In addition to federal grants, there are local and state-level grants, as well as grants from publicly traded companies, private companies, and nonprofit organizations. When seeking grants that align with their business goals, entrepreneurs can narrow their search based on industry, demographics, or sustainability initiatives. The options are abundant.
By reviewing the eligibility requirements, entrepreneurs will determine if their business qualifies for a particular grant. The final step is to apply for a grant, which is straightforward but may require extensive paperwork and business documentation (e.g., a grant proposal, business plan, and financial statements).
Invoice Factoring
Small businesses that experience fluctuations in cash flow might face periods without adequate capital to cover operational costs. Managing day-to-day operations, paying bills, and seizing potential growth opportunities during these times can be difficult. Invoice factoring is an alternative financing option that can help businesses weather a downturn.With invoice factoring, a business sells its unpaid invoices to a lender or factoring company at a discounted rate. Then, the lender or factoring company provides the business with an influx of cash by advancing a portion of the total value of the unpaid invoices, usually 70% to 85%. When customers/clients pay their outstanding invoices, the business repays the lender or factoring company minus any applicable fees or interest.
Business Line of Credit
A business line of credit lets business owners access funds as needed, up to an approved limit, from a business checking account. Interest is only paid on the amount borrowed, making it an efficient way for business owners to manage their company's cash flow, cover unexpected expenses, or finance short-term costs.Business owners can select between two types of business lines of credit based on their needs and the offerings of their bank or lender: a revolving line of credit and a non-revolving line of credit. A revolving credit line, like the unsecured Business Xpress Line of Credit offered by Ameris Bank, replenishes once the borrowed amount is repaid, which provides ongoing access to funds. On the other hand, a non-revolving credit line offers a fixed amount of credit that can be used only once—the account closes once all funds are accessed and repaid.
Are you looking for more tips on financing, running, and growing your small business? Visit our business blog to access feature-filled articles that cover these and other topics.
1 https://www.grants.gov/support/about-grants-gov.html
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ameris Bank is not affiliated with nor endorses Kickstarter, Indiegogo, CrowdFunder, or Grants.gov.