For startups, raising capital can be necessary to get the business off the ground for launch. In the case of an early-stage business, a generous capital injection enables it to expand more quickly and become profitable. Whatever the stage of your business, knowing the alternatives for raising capital, beyond traditional options like business loans and tapping into your own savings, can be useful. It could enable you to make a smarter decision about the kinds of investors you turn to or the channels you utilise and ultimately determine your business’s success or failure. Here we explore some of the best alternative ways of raising capital for your business.
1. Crowdfunding
Crowdfunding is one of the most exciting-capital raising options today. Due to their leveraging of the unlimited reach of the internet, crowdfunding platforms can pool capital from large groups of investors to fund businesses. Investors could number in the hundreds or more. There are a few different types of crowdfunding, but with equity crowdfunding, the business or project creator outlines their idea and funding goal. Investors pledge capital and in exchange receive shares in the business.
The platform is typically responsible for coordinating, managing, and vetting the process and prospective investors and businesses. As a result, this can help eliminate the significant challenges associated with other fundraising avenues. In many cases, the right crowdfunding platform can see startups and other businesses raising capital more quickly than through traditional channels while promoting their business to advocates who then spread the word. At the same time, the shareholder/investor has the opportunity to invest small amounts, allowing them to diversify and better manage portfolio risk.
2. Peer-to-peer lending
Peer-to-peer lending is another alternative to traditional forms of financing for businesses. Lenders and businesses come together on a dedicated platform and the business borrows from the lender or multiple lenders. Unlike equity crowdfunding, peer-to-peer lending doesn’t involve the business giving away any equity. Instead, the lender earns interest on their money. Without the traditional bank that might charge a premium, peer-to-peer lending might offer businesses more competitive rates and save them from lengthy application-approval processes.
3. Trajectory growth funding
Trajectory growth funding is a relatively new type of alternative funding that allows businesses access to capital without giving away equity. Generally speaking, it’s an unsecured loan that’s based entirely on the business having an established history of good fundamentals. If your business has a good sales history with a strong cash flow record, you might be able to access this type of financing.
4. Venture capital
Although in the mainstream, venture capital is an alternative option to traditional banks. Venture capital firms tend to invest in early-stage businesses and startups that they perceive to have long-term potential, in exchange for equity in the business. Ordinarily, the capital is sourced from wealthy investors, investment banks, and other financial institutions. With venture capital, you may also receive technical or management guidance in addition to funds.
5. Angel investing
Angel investors are typically wealthy individuals who finance startups on an independent basis or with other angel investors. Typically, the angel investor receives equity in the business and may have expertise in your industry and be able to provide advice and guidance. Angel investing is, for the most part, associated with very early-stage businesses that are riskier investment options. Startups that are perceived to be high risk and find it challenging to obtain other forms of financing might find an angel investor willing to invest in their idea.
6. Government funding and grants
Capital raising doesn’t necessarily have to be sourced from private individuals and organisations. Consider government funding and grants or tax incentives that allow your business to access extra capital. You might be able to apply for grants targeted at minorities and women or specialist industries like tech and green sectors. If you have an innovative idea that could potentially deliver positive social and community outcomes, research the various grants available in your area to see if you might qualify for a government incentive.
7. Nonprofits and philanthropists
Research the nonprofits and philanthropists involved in your industry and build relationships with them. Some of these groups may allocate funds to support impact investing initiatives. If your idea could potentially drive their cause forward, connect with the nonprofit and ask for an opportunity to present your idea to their board. Even if they don’t have financing available for you, they might have prospective investors in their network they could connect you with.
At some stage, most if not all businesses will require an injection of capital. Whether it’s to grow your team and bring on the right talent, to invest in product or service development, or to purchase important assets, this working capital allows you to expand. While in previous times businesses might have been limited mostly to banks and time-consuming loan processes, today, they have different alternatives for sourcing capital financing. Crowdfunding and peer-to-peer lending offer an almost direct relationship with prospective investors or lenders. Other options like trajectory growth funding and angel investing can also be more accessible for early-stage businesses. Other options like government incentives and nonprofit organisations could also allow you to access the capital you need.
