What alternatives are there to financing your business?
Many aspiring entrepreneurs have a innovative idea / concept for their startup but lack the funding to get the idea off the ground. Brand new businesses are often turned down when applying for bank loans due to banks not seeing it as a lucrative venture. Even if you manage to establish your business, finding capital can still be hard to secure.
Before you look into the different types of financing, you should read our previous article about the concept of alternative finance for small businesses to educate yourself on the basics so you can really grasp these different types of financing.
So what are your options left after the traditional bank loan? Here at Crowdholding, we have gathered 5 of the newest alternative finance options that could allow your startup to not just be a pipe dream but a reality.
ICO (inital Coin Offering)
Initial Coin Offerings (ICO’s) are the newest way to raise capital for startups, This year alone technological based startup companies have raised nearly 1.3 billion dollars this year alone through ICO’s, Bancor managed to raise $153 million alone. ICO’s are a mixture of an IPO (Initial Public Offering) and Crowdfunding.
The only drawback is that it is for startups who are looking to create a cryptocurrency, so if your company is not involved in that sphere it is better to look for another alternative. If you wish to know more about ICO’s, we recently wrote an article about ICO’s and if you should invest.
Peer to Peer lending
Another reasonably new way to secure finance is through Peer to Peer lending. P2P companies started around 12 years ago and now have broken into the many industries such as journalism, the fashion industry and even into the financial sector.
The general concept is that everyone gets a better deal compared to a traditional bank loan, lenders get a higher rate of interest compared to a savings account in a bank and borrowers pay less than they would on a bank loan.
There are many big websites such as Funding Circle, Lending club and Streetshares. This way is also advantageous because you can receive the financial backing in a shorter time without having to fill out a mountain of paperwork.
Crowdfunding
The concept of Crowdfunding is also one of the buzzwords for raising capital such sites as Kickstarter and Indiegogo. This works by promoting your product / concept and allowing anyone to invest. This could be thousands of people all pledging 10 dollars each. This type of fund raising is better for a new product / idea than a second or third round of investment.
The main advantage is that these sites are very popular, and instead of searching for that one large investment you have multiple sources who actually are interested in your product.
Make sure to read all the details though as different crowdfunding websites have different payment processing fees to require the business to reach their goal before they can receive any of the money raised.
Here is a link with some great tips on how to make a successful Crowdfunding campaign.
Angel Investors
If you are willing to sacrifice some equity in your startup, angel investors could be the source of income for you. There have been numerous success stories from angel investing such as Whatsapp, Uber and Facebook.
Angel Investors invest in the early stages of a startup in exchange for a percentage of your company. The one main advantage (apart from the cash of course) is that usually angel investors are passionate about your project and may have some insight into your industry field, making them a powerful ally. Also if the investor is a well renowned professional in his / her field it can add credibility to your startup.
Venture capitals
Venture capital are similar to angel investors, but they are an institution (a group of investors) rather than a single one. They fund that startups that are considered have high risk potential and a high growth rate.
The main advantage to this source of financing is similar to Angel investors, they usually focus on certain industries meaning that you can receive a wealth of knowledge and experience as well as capital. The downside is that usually they will expect a large percent of equity, usually around 25–30%.
All of these alternative ways of financing can be extremely fruitful, but it is about finding the right one for your company. Click on our article about “raising capital, and preserving equity” if you need more ideas on which direction to go.
