6 Alternative Financing Methods for Startups

Financing is a crucial piece of the puzzle for almost every business. Unless you have access to enough capital to bootstrap your business or raise it from family and friends, chances are you'll need a loan or investments. When a conventional bank loan isn't right for you, or if you're looking for an additional injection of capital to grow your company, there are plenty of other options. Here are six alternative ways to finance your startup or grow your small business.

Online lending

Online lenders have become a popular alternative to traditional business loans. These platforms have the advantage of speed, as an application takes only about an hour to complete, and the decision and accompanying funds can be issued within days. Analysts estimate that the marketplace lending industry could reach $150 to $490 billion in loans issued by 2020. Visit Business News Daily's guide to choosing a lender here. Editor's note: Are you considering a small business loan for your business? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have our sister site BuyerZone provide you with information from a variety of vendors for free: buyerzone widget

Angel investors

Angel investors invest in early-stage or startup companies in exchange for a 20 to 25 percent return on their investment. They have helped to start up many prominent companies, including Google and Costco. Mark DiSalvo, CEO of private equity fund provider Semaphore said, "You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in." Find out what angel investors look for when funding a business.

Venture capitalists

Venture capital is money that is given to help build new startups that are considered to have both high-growth and high-risk potential. Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company frequently. Brian Haughey, assistant professor of finance and director of the investment center at Marist College, said that because venture capitalists focus on specific industries, they can generally offer advice to entrepreneurs on whether the product will be successful or what they need to do to bring it to market. However, venture capitalists have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window, he said. Learn more about venture capital.

Factoring/invoice advances

Through this process, a service provider will front you the money on invoices that have been billed out, which you then pay back once the customer has settled the bill. This way, the business can grow by providing the funds necessary to keep it going while waiting for customers to pay for outstanding invoices. Eyal Shinar, CEO of small business cash flow management company Fundbox, said these advances allow companies to close the pay gap between billed work and payments to suppliers and contractors. "By closing the pay gap, companies can accept new projects more quickly," Shinar told Business News Daily. "Our goal is to help business owners grow their businesses and hire new workers by ensuring steady cash flow." Check out BND's guide to choosing a factoring service.

Crowdfunding

Crowdfunding on sites such as Kickstarter and Indiegogo can give a boost to financing a small business. These sites allow businesses to pool small investments from a number of investors instead of having to look for a single investment. Make sure to read the fine print of different crowdfunding sites before making your choice, as some sites have payment-processing fees, or require businesses to raise their full stated goal in order to keep any of the money raised. Check out some emerging trends in crowdfunding.

Grants

Businesses focused on science or research may be able to get grants from the government. The SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Recipients of these grants are required to meet federal research-and-development goals, and have a high potential for commercialization. Learn more about applying for a small business grant. Additional reporting by Nicole Fallon and Adam C. Uzialko. Some source interviews were conducted for a previous version of this article.