Inflation and the economic downturn have put tremendous financial strain on startups and small and medium-sized businesses (SMBs). In fact, 46% of companies that have applied for or plan to apply for a line of credit say they’ll use the funds to offset inflation.
With business loan approval rates at major banks hovering around 15%, entrepreneurs need other solutions. That’s where alternative funding comes in, giving companies access to capital from sources beyond traditional banks. Also called alternative financing, this includes everything from peer-to-peer lending to revenue-based financing.
Alternative funding options are essential, especially in today’s economy. While 57% of business founders launched their companies using personal savings, just three months after launch, most turned to additional financing sources. On top of that, racial bias continues to limit many business owners’ access to traditional bank loans, making alternative funding not just helpful, but often necessary.
- Alternative and Peer-to-Peer Lending
As a $2.8B market, alternative lending platforms offer every entrepreneur a way to secure funding outside of the traditional banking system. Peer-to-peer (P2P) lending platforms are a great example, connecting borrowers directly with individual investors who provide the funds.
Prosper is a P2P lending platform where you can access personal loans from $2K to $40K, as well as a credit card. The online application is quick and doesn’t require collateral. However, if your credit score is below 600, your application may not be approved.
Funding Circle is another alternative lending platform focused on small business financing. To qualify, you’ll need a personal credit score of at least 660, no bankruptcies in the past seven years, and your company must have been in business for at least two years. If you meet these criteria, you could be eligible for loans from $25K to $500K, with fixed interest rates and monthly payments.
- Tax Credits
If your company invests in research and development, you may qualify for R&D tax credits to help fund your business. Startups can also claim up to $250K to offset payroll taxes, provided their gross receipts for the fiscal year don’t exceed $5M and they have no more than five years of gross receipts.
In the US, R&D tax credits are available to businesses in a wide range of industries, including:
- Software development
- Cloud computing
- VR (virtual reality), AR (augmented reality), and gaming
- IT (information technology)
- Biotechnology and pharmaceuticals
In Canada, businesses can apply for the Scientific Research and Experimental Development (SR&ED) tax program.
- Venture Capital
Venture capital (VC) investors provide funding in exchange for equity, usually taking no more than 50% ownership in the company. VCs typically invest in early-stage companies with high growth potential and support them with their expertise and business networks.
Raising VC funding is a complex process that relies heavily on building relationships. Connecting with VCs from both large and small firms and establishing trust over time will boost your chances of success.
Even though the number of VC investors has grown nearly sixfold in the past 15 years, VC-backed companies still make up less than 1% of all US businesses. And despite the headlines about multimillion-dollar funding rounds, most startups finance their growth by combining different funding sources rather than relying solely on VCs.
- Angel Investors
Angel investors and VCs are often grouped together, but there are important differences.
For example, VCs invest on behalf of a group of partners, while an angel investor is an individual who uses their own money to support businesses. Angel investors also tend to back startups at a very early stage, often before any outside funding has been raised.
One thing they have in common: angel investors also invest in exchange for equity. They often provide business advice and introduce founders to valuable contacts who can help the company grow.
Founders can connect with angel investors through networking or on websites like AngelList and the Angel Capital Association.
- Grants
Grants are another way for business owners to secure funding without taking on debt or giving up equity. Grants can be offered by companies or government agencies, and usually require a business plan as part of the application. There are also grants specifically for veteran-, women-, and minority-owned businesses.
Among company-sponsored grants, the FedEx Small Business Grant supports small businesses that have been operating for at least six months, have fewer than 99 employees, and use shipping as part of their operations.
Startups and small businesses can also apply for Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) grants. To be eligible, businesses must have fewer than 500 employees.
- Merchant Cash Advance
A merchant cash advance (MCA) gives your company immediate cash, which you repay daily or weekly from your debit and credit card sales, plus fees. MCA providers include Rapid Finance and Greenbox Capital.
Because the APR (annual percentage rate) on an MCA can reach up to 350%, it should only be considered in emergencies, such as a sudden cash flow crunch.
A low credit score won’t automatically disqualify you from an MCA, since providers focus more on your revenue. Higher sales can also help you secure a lower interest rate (or factor rate). However, an MCA won’t help you build your business credit, since it’s a cash advance, not a traditional loan.
- Revenue-based Financing
Revenue-based financing solutions like Lighter Capital provide companies with funding in exchange for a percentage of monthly revenue. It’s similar to an MCA, but revenue-based financing is designed for startups, not merchants, and payments are collected monthly instead of daily.
This is a good alternative for companies that already have steady revenue. Funding amounts can reach $3 million, but high interest rates mean you could end up paying back double—or more—of what you borrowed.
- Startup Incubators
A startup incubator is a program that helps founders turn their ideas into real businesses, raise seed funding, find mentors, get legal advice, and more. For example, Launch House recently announced a $10 million fund for startups, offering up to $150,000 per investment.
Many incubators also provide startups with office or co-living space, which is a great way for founders to connect with others in their industry.
With hundreds of business incubators across the US, it’s helpful to narrow your search by industry and location. Tech-focused incubators include Idealab and Z80 Labs. If your business is already up and running, consider joining a startup accelerator, which is better suited for established companies.
- Crowdfunding
Indiegogo, Kickstarter, and GoFundMe are all options for business owners looking to raise money through crowdfunding. Depending on the platform, campaigns offer incentives to attract investors, such as early access to a product or service.
For startups that want to avoid being associated with mainstream crowdfunding platforms, options like SeedInvest and StartEngine only feature vetted companies. These equity-based crowdfunding campaigns are regulated by the SEC, which limits startups to raising a maximum of $5 million over 12 months.
Fund Innovation and Growth With BoastClaim R&D
Companies that don’t take full advantage of tax incentives are leaving money on the table.
For example, analytics firm Pisano Insights secured a 20% larger claim by using BoastClaim, our AI-powered platform that gathers and analyzes data to help businesses maximize their R&D tax credits. The company also saved its employees more than 50 hours of work, freeing them up to focus on business growth.
By claiming every available tax credit and saving time in the process, startups and small and medium-sized businesses (SMBs) can focus on driving more innovation.
Learn more about the R&D (US) and SR&ED (Canada) tax credits by downloading our free guides
