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Non-Bank Financing Methods for Startups

Non-Bank Financing Methods for Startups
Credit: Melpomene/Shutterstock

According to the Annual Survey of Entrepreneurs (ASE), the primary sources of initial financing for new businesses in the United States are personal and family savings, bank business loans and personal credit cards.

Every startup needs access to capital, but not every entrepreneur has the means to self-fund their business, or feels comfortable asking friends and family to help. In such cases, successful entrepreneurs must think creatively about how to acquire cash.

There are plenty of financing options available, whether you're looking for initial funding to kick-start your business or an additional injection of capital to grow. Business News Daily compiled six alternative ways to give your startup the leverage it needs.

Editor's Note: Looking for information on business loans? Fill in the questionnaire below, and you will be contacted by alternative lenders ready to discuss your loan needs. 

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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.

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."

Angel investing is geographically concentrated. Boston, New York City, San Francisco and Washington, D.C. are some of the most vibrant markets.

Find out what angel investors look for when funding a business.

Venture capital is money 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. [Interested in alternative small business loans? Check out our best picks.]

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 advise 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 window, he said.

According to PricewaterhouseCoopers most recent "MoneyTree Report," the U.S. market experienced a record second quarter in 2018 for venture capital funding deal activity.

Learn more about venture capital.

With factoring, 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 keep going while waiting for customers to pay their 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 said. "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 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 several investors instead of seeking out a single investment source.

Read the fine print of different crowdfunding sites before making your choice. Some sites have payment-processing fees or require businesses to raise their full financial goal to keep any of the money raised.

Check out some emerging trends in crowdfunding.

Businesses focused on science or research may receive 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 Jennifer Post, Adam Uzialko and Nicole Fallon. Some source interviews were conducted for a previous version of this article.

Carlyann Edwards

Carlyann is pursuing her Bachelor’s degree in Business Journalism with minors in sustainability and music at The University of North Carolina at Chapel Hill and will graduate in 2020. She is incredibly interested by the intersection of business development and environmental preservation. When she isn’t writing, she enjoys working for non-profit organization Carolina Thrift, running and playing the ukulele. She can be reached by email or LinkedIn.