Small business financing: Top 5 alternative options for funding

March 02, 2016

Funding your small business is one of the most important and difficult decisions that you will face as an entrepreneur. Nearly every business owner comes to a point where small business financing is required and growth simply cannot be funded from revenues. At that point a business has two choices: take on debt (a loan) or give up equity (an investment).

The fact is, even for small business owners with stellar credit, bank funding is getting even more difficult to secure. A clear indicator of the continuing squeeze on lending to small firms is the fact that, according to the 2015 DNA of an Entrepreneur Report, 21% of American small business owners have admitted to using their credit card to fund their business.

So, what’s a small business owner to do when they can’t get funding? Check out our list of the top 5 ways to get alternative funding for your small business.

1. Crowdfunding

Crowdfunding is getting a bunch of people to put up a little money each in order to fund your business. Crowdfunding began as a way for independent artists to fund their creative projects, and some sites still focus on this market. But there are crowdfunding sites that you can use to get funding for your business as well.

Crowdfunding is a good method to use if you need money in order to produce your product. Some sites encourage businesses to offer a ‘perk’ in exchange for a donation; others let you set up a campaign for people to pay for a product in advance, so you can use the money for production costs.

Some business-friendly crowdfunding sites include Indiegogo, RocketHub, Peerbackers and Rainbow Campaign, which is set up specifically for LGBT campaigns. It is important to note that some crowdfunding sites, like GoFundMe are used for collecting donations and are typically not appropriate for a business venture since the people who provide money do not get anything in exchange.

Setting up a crowdfunding campaign may seem like a long shot, but consider that some of the most buzzed about businesses of today got their start using crowdfunding . A good example is the virtual reality company, Oculus Rift. The trick to successful crowdfunding is to treat it seriously, leverage your existing social network, and come up with a very convincing argument as to why your product is a game changer.

2. Alternative Lenders

Obviously, a loan is a good way to get the money you need to expand a business that’s already successful. However, if you can’t get a business loan from a bank (or don’t want to), there are some other options.

The U.S. Small Business Administration offers small business loans, including microloans of up to $50,000. These loans are administered through an intermediary which qualifies the applicant and administers the loan. Most intermediaries require collateral of some kind, and a personal guarantee from the business owner.

Alternative lenders like CAN Capital and Kabbage specialize in small business credit lines.

Funding Circle is also an option - this resource collects money from investors and lends it to small businesses. You pay a reasonable interest rate and the investor gets a reasonable return, and you don’t need to qualify for a bank loan. These loans are secured, so you’ll have to have some collateral.

3. Angel Investors

An Angel Investor is an affluent individual who provide funding for startups, typically in exchange for an ownership stake in the company. There are several options for finding angel investors. Your local small business incubator is a great place to start, but you can also check:

AngelList, a company that lets startup companies raise money online from investors. It also manages funds which consist of several companies in a single sector, such as consumer tech or enterprise tech, or a more diversified group of companies.

AngelList also organizes syndicates, whereby primary investors make an investment and then invite other investors to join them to complete the investment round. AngelList also acts as an employment recruiter for startups.

CircleUp focuses on crowd investing in consumer companies. CircleUp helps entrepreneurs present their businesses, and puts interested investors in touch. Investors and business owners talk directly to each other and can negotiate terms. CircleUp assists with closing the deal, escrow and transfers.

4. Friends and family

Asking for money from friends and family is a time-honored way to get the cash you need to expand your businesses. It’s also a time-honored way to ruin relationships. If you are going to take money from friends and family, here are a few things to keep in mind.

Agree on the terms, and put them in writing. If you’re getting a loan, make sure both parties understand the terms. Decide on an interest rate and a payment schedule, and determine what will happen if you miss a payment or you cannot pay the money back. If you do get into a jam and cannot make a payment, address the situation immediately and adjust the agreement.

If your friend or family member will get equity in the company, make sure that’s in writing too. It may help to have an attorney draw up your agreement, which should address the amount of the investment and the percentage of the company your benefactor will receive in return. If the investor doesn’t want to be involved in the business for the long term, outline an exit strategy as well.

5. If all else fails…. There’s always Shark Tank

Granted, it’s a long shot, but you can’t argue with the success of the reality show Shark Tank. Business owners present an investment opportunity to five well-known business gurus, who grill the presenter and then decide whether to make an offer to invest.

About half of the companies that are selected to present on the show make a deal with one or more of the ‘sharks.’ But even those businesses that don’t get an investment from one of the show’s uber-successful entrepreneurs see a big spike in business just from the exposure they get on the show.

Whether you want to go this route or not, watching the show is a great way to learn what investors want to know about your business before they invest.

Whatever funding option you choose, investors will want to be sure that you are taking your business seriously, and that you are taking steps to protect it and their investment. Before you apply for funding, be sure you have commercial insurance in place, as well as any specialty insurance coverage your specific business may warrant.