Unconventional Funding Options for Small Businesses

Whether you are running an LLC, sole proprietorship or any other type of business, you are going to need funding. Even the best ideas need money to get the business off the ground.

A traditional small business loan is one of the more obvious ideas for funding, but it might not be the right choice for every business or for every situation.

Some small businesses might not be able to get a traditional bank loan or there might be needs left unmet by conventional funding options.

Fortunately, there are more funding options for small businesses than ever before.

Let us take a look at unconventional funding options that can be useful for modern small businesses.

Peer-to-Peer Lending

Peer-to-Peer (P2P) lending is a system that connects individual lenders to borrowers.

The idea is to make funding more accessible and affordable by cutting out banks and other financial institutions. Most P2P lending occurs on online platforms that help to match lenders to borrowers and facilitate the loan.

While P2P lending does cut out the banks, it does not mean that there is no oversight or red tape. The sites do have terms and conditions. Along with that, they will usually have some process for checking credit scores, evaluating lenders and setting the terms for each loan agreement.

P2P loans can be a good option for businesses that may have trouble getting approved for a bank loan. Businesses can usually get funds faster with P2P loans, so it can be a good option when you need money in a hurry. With that said, they tend not to be a good option for larger loans. P2P loans usually fit in a range that covers from just a few hundred dollars to maybe $20,000-$30,000.

Crowdfunding

Crowdfunding has grown in popularity over the last few years.

This funding model allows a small business to get small amounts of funding from a wide pool of people. The business runs a campaign on a crowdfunding platform, and they might offer different types of rewards to encourage participation.

The advantage is that crowdfunding can offer an alternative for businesses that might not have the ability to get funds from traditional financial institutions. If you can get enough people interested, you can raise the funds you need to get your business off the ground.

It can also be advantageous because it can be a way to raise funds without incurring debt or giving up a stake in the company.

It is important to note that there are different crowdfunding models. You can use equity crowdfunding, which is a way to use equity in the company to raise funds. You also have a basic model that involves just pitching the idea and hoping people donate money because they believe in your vision. You also have rewards-based crowdfunding, which involves offering different gifts or rewards for different levels of support.

As great as crowdfunding may sound, it is important for business owners to be realistic.

You will hear a lot about the businesses that raised hundreds of thousands of dollars, but there are many more that never came close to reaching their funding goals. Additionally, you have to be able to promote the campaign for it to have success.

Factoring

With Factoring, you take expected income and use that as a way to get funding now.

A common model for factoring is to sell invoices to acquire funding.

As an example, if you have a $10,000 invoice due at the end of the month, you might be able to use that to get funding from a factor. The factor would then collect on the invoice while charging various fees.

In most cases, the business would sell its accounts receivable to the factor. That means the business could focus on their core operations and the factor would handle collecting on invoices. This is advantageous because the business does not have to wait weeks or months for their clients to pay. Along with that, the business no longer has to deal with the hassle that can come with getting clients to pay.

This can be good for businesses that have contracts that may take a long time for clients to pay. It can also help to make your finances a little more predictable. The main downside is that you do have to sacrifice some of the value of the invoices to the factor. They will charge fees and they might also charge interest. Depending on the factor and the circumstances of the business, the costs can add up.

Microfinancing

This is similar to a cross between a P2P loan and crowdfunding. With this option, the business takes a bunch of small loans directly from lenders and packages them together to meet a larger funding need. This is another option that involves using online platforms to meet lenders and manage loans.

The possibilities with this option can vary significantly. You might have a bunch of lenders that invest as little as $20, but there may also be lenders that offer hundreds or thousands of dollars. Depending on the business or the platform, it can fund anywhere from $500 to $50,000.

These loans are for businesses that need a little funding to get a small business going. With many of the platforms, the idea is to provide small loans to people in disadvantaged circumstances. They are usually small loans at low interest for people who would not be able to get funding from traditional lenders.

With alternative funding, businesses have more opportunities than they did in the past. You just have to take the time to understand your needs and do a little research to find the funding sources that will work best for your business.

Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing (of course).