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Starting a new business can be exciting and scary at the same time. You get excited to be your own boss and terrified of the uncertainties and challenges that lie ahead. The biggest among those challenges is raising enough money to get the new business off the ground. External start-up funding is so elusive that a majority of budding entrepreneurs resort to bootstrapping their new ventures, often with nowhere enough cash to see them through. It’s no wonder “running out of money” is one of the top reasons start-ups fail.
While bootstrapping a start-up can be highly rewarding, it has its dangers too. But you don’t have to gamble with your start-up’s financial stability and survival. You can quickly secure the much-needed start-up capital if you know where to look and keep an open mind about business funding. This article points you in the right direction to start-up financing by listing the top six ways to fund a new business.
Why is it so difficult for start-ups to get financing?
Start-ups often struggle to secure conventional financing such as loans and lines of credit because they are considered high-risk borrowers. Banks and institutional lenders, in particular, have strict qualifying requirements that most start-ups simply can't match. Start-up financing applications can get rejected for any of the following reasons:
- Unproven business model
- No business history
- Poor or no business credit
- Unconvincing business plan
- Target industry or niche is too risky
- Not enough collateral or any at all
- Lack of cosigners or guarantors
- No proof of revenue or sales
It's understandable for financial institutions to have funding qualification criteria with such a long and demanding checklist. They want to lend money to borrowers they’re certain can pay them back. Unfortunately, this extreme lending caution locks out most start-ups, including those with genuinely promising business ideas.
Alternative financing for start-ups
There are many ways to get a business funded without necessarily borrowing from banks. Nowadays, you can get decent enterprise capital from fintech companies, online lenders, peers, investors, and even the general public. This is known as alternative financing and is a fast-growing and increasingly popular segment of the financial market. Alternative financing gives first-time entrepreneurs more flexibility and variety when choosing funding options.
Here are six funding avenues you might want to look into when launching a start-up:
Crowdfunding
Crowdfunding is probably the safest way you can raise capital for a start-up. As the name suggests, individuals in a “crowd” or large network of people each contribute a small amount of money toward starting a business. The funders could be investors or just members of the general public. Crowdfunders give out their money as donations or in exchange for exclusive rewards once the business launches (equity, discounts, membership deals, early access, etc.).
Modern-day crowdfunding started in 1997 on ArtistShare, the first crowdfunding website. The idea has since blossomed into a multi-billion-dollar industry, with countless platforms such as Kickstarter, Indiegogo, and GoFundMe hosting millions of crowdfunding campaigns every year.
At a 22.9% success rate, crowdfunding has way better odds than bank loan approval.
Equity financing
Equity financing refers to raising capital through selling shares or ownership of the business. This type of financing can take many forms, including initial public offerings (IPOs), peer investments, and crowd investments (crowdfunding with an equity component). But for a fresh start-up, it’s best to go with venture capitalists (VCs) or angel investors.
Angel or seed inventors are wealthy individuals who provide financial backing to start-ups in their early stages in exchange for equity. They normally invest their own money, not necessarily in the business itself, but in the idea, cause, or entrepreneur behind it. On the other hand, VCs fund start-ups in return for equity, usually through their portfolios or affiliated networks. Venture capitalists target start-ups exhibiting great potential for growth, particularly those with a product or service that's ready for market.
Business credit cards
Business credit cards work just like personal credit cards. However, they are better suited to enterprise use due to their business-friendly perks, spending limits, and repayment terms. A business credit card can provide your start-up with what is essentially a revolving line of credit. This could come in handy to supplement working capital before the business can stand on its own.
Qualifying for a business credit card is relatively easy, even for a start-up. The card provider will probably only want to see your basic business information, personal details, sales figures (if any), and spending estimates.
Invoice factoring
Unpaid customer invoices can tie down a lot of the much-needed working capital during the early stages of a new business. This is a common problem for established firms as well. According to industry statistics, the average DSO (days sales outstanding) on invoices is 67 days, and 39% of invoices are paid late.
Invoice factoring lets you borrow money against your unpaid invoices and other accounts receivable at a relatively low cost. A factoring company can also buy your outstanding invoices at a discounted price, usually between 80% and 90% of their value. Either way, factoring is a low-risk approach to keep the cash flowing when you need it the most.
Peer-to-peer lending
Peer-to-peer (P2P) lending platforms, clubs, and networks connect cash-strapped entrepreneurs directly to willing lenders, cutting out the middleman (financial institutions). Without the bureaucracies and caution of lending institutions, “non-creditworthy entrepreneurs” stand a better chance of getting the funds they need to start and grow a business.
Various websites and online services such as Lendzero make this style of financing possible. Lendzero is a fintech service built on the principles of P2P lending, the core of alternative financing.
Microfinancing
Microfinancing is a type of alternative business funding targeted at borrowers who cannot access traditional lending resources. It’s usually structured as short-term microloans ranging between $10,000 and $50,000 or working capital loans. It may not be much, but it’s a good place to start building business credit and borrowing history for better financing in the future.
Since microfinancing is designed for borrowers otherwise branded as “non-creditworthy,” it easily accommodates start-ups and first-time entrepreneurs.
Lendzero: your start-up financing partner
Alternative financing gives you access to loans for bad credit, start-up funding, non-debt financing, and many other non-traditional lending solutions. And what better way to shop for all these than with Lendzero?
Whether you’re looking to finance a new venture or grow an existing enterprise, Lendzero has your back. It’s an online platform that lets you choose the ideal funding product for your business from dozens of prequalified, pre-negotiated offers from a vast selection of lenders. Lendzero is the quick, hassle-free way to get borrower-friendly financing for SMBs and start-ups. Sign up today and unlock the power of alternative business financing at absolutely zero cost.
