Fundraising is an ongoing activity for every business, not just startups. Working capital is required for operations, salaries, expansion, product development, marketing, and other expenses. It can also be a key component in calculating valuation. Acquiring this capital through traditional bank loans is one way to get it, but it’s not the only way.
In this article, we’ll go over some alternative funding options that may be a good fit for businesses looking to extend their working capital to fund essential business expenses.
What is alternative funding?
Alternative funding is any type of business financing that comes from sources other than traditional bank loans. It generally falls into two categories: equity funding and debt funding. The former helps to increase the valuation of the business, but it requires financial dilution of ownership shares. The latter creates a liability, or debt, that needs to be paid back within agreed upon terms.
Many businesses are turning to alternative funding in lieu of traditional loans because the alternatives can offer more flexible terms and build value. With a good business plan and evidence of scalability, a business can raise more money from alternative sources with limited downside. A loan from a bank or credit union simply puts the company in debt, which may not be ideal for some.
Before reviewing the types of alternative funding available, calculate how much money you need to raise and why you need it. Will it help you develop a minimum viable product (MVP) to go to market? Are you going to use it for salaries and operating expenses? Will it slow down your burn rate? Investors and lenders will want answers to these questions before moving forward.
Alternative funding benefits
There are some clear benefits to opting for alternative funding instead of more traditional bank loans. To start, most alternative inventors and lenders are more concerned with business credit, not your personal history. But there are lot more benefits to consider:
Faster way to get funds
Alternative funding often provides clients with streamlined applications compared to traditional banks. On that note, banks, if they’ll even approve you for that kind of money, could take weeks to process your application. And when you’re in need of funding, these weeks can make a huge difference in your businesses’ viability.
Better interest rates
Alternative lenders expect to get paid back, but their terms and conditions might be better than what the bank has to offer. When it comes to equity funding, investors will negotiate funding in exchange for a certain amount of equity in your business, so there’s no interest rate or monthly payments to make.
Have you ever applied for a business loan from a bank? The paperwork and backend work required to compile appropriate documents, can be tough to navigate. Alternative funding is different. In some cases, you might only need to sign one document. The terms and conditions are simpler because you won’t need to deal with variable interest rates, indemnity clauses, or amortization schedules.
This is a benefit exclusive to equity funding. Adding more working capital to a company, even though you’re diluting ownership shares, increases the valuation of the business. This could come in handy when it comes time to go public or exit via sale, but it’s also a risk. The company needs to grow after the funding becomes available for the equity distribution to pay off.
What are the popular types of alternative funding?
Business owners often think of funding in two categories: equity and debt. Those are the major sources for financing, but they’re not the only ones. We’ve also added franchising and bootstrapping here, plus several subcategories for equity and debt funding. For simplicity, we’ve broken this down into four fundraising options for your business.
Option #1: Equity funding
Equity funding is taking money from an investor in exchange for an equity stake in your company. The amount of that equity is determined by the valuation of the company and the amount of money being invested. Equity funding can be acquired from the following sources:
- Crowdfunding: This is a popular method of obtaining equity funding. There are several crowdfunding platforms where you can post your ideas or business objectives and offer equity in exchange for invested funds. Many smaller companies start out this way to prove there is an interest in the product or service they’re offering.
- Angel investors: High net worth individuals who provide financing for startup companies and entrepreneurs are known as “angel investors.” They could be someone you meet through a network or mutual connection or a close friend with deep pockets. Either way, that “angel” could help you get your business started.
- Venture capital firms: Crowdfunding and angel investors are good for startups and smaller companies. Venture capital firms are where you’ll find the money to grow into something substantial. In exchange for equity, a venture capitalist could fund your pre-seed, seed, or growth stage. VC investments range from $100K to several million dollars.
Option #2: Debt funding
- SBA loans: The US Small Business Administration (SBA) works in conjunction with local banks to partially guarantee loans for startups and small businesses. These count as alternative financing because the terms are more flexible than a normal bank loan, interest rates are lower, and the qualifying criteria is less stringent.
- Venture debt: Companies that are funded by venture capital can qualify for venture debt offered by specialized lenders. This option is often used to extend the cash runway or cover capital expenses as the startup scales between equity rounds. Like SBA lenders, venture debt lenders may be able to offer flexible terms and low interest rates.
- Revenue-based financing: Companies with recurring revenue models (e.g., SaaS, payments) can work with specialty lenders to access capital in exchange for, or underwritten per, future revenue. This option allows companies to scale on their terms, leveraging future sales to drive near and long-term growth.
- Peer-to-peer lending: Several popular online loan sites are peer-to-peer lenders. Think of it as a group of investors offering their money in a pool to assist business owners like yourself by offering business loans. Terms and interest rates vary and can run high with certain sites, but the approval criteria are fairly lenient.
Option #3: Franchising
Small companies that want to become big, multi-location companies can put together a franchise program to grow their annual revenues. Think restaurants, convenience stores, and gyms. One notable example of a franchise model that’s worked out very well is McDonalds. They started out as a single hamburger stand in 1955. Last year, their revenue was over $20 billion. That only happened because they chose to franchise their idea.
Option #4: Bootstrapping
A common misconception about bootstrapping is that the business owner needs to cover everything out of pocket. That’s not true. Bootstrapping refers to an entrepreneur building a company from personal finances, but it also means that growth happens by using operating revenue. To bootstrap is to grow without giving up any equity.
How can Ramp help you with alternative funding
Through our platform, businesses can access the working capital they need to grow their business faster, while having the finance automation tools at their disposal to manage it. We can even help you build your business credit. Here’s how:
1. Commerce sales-based underwriting
Unlike some revenue-based lenders, Ramp has reasonable banking and revenue requirements to offer you the credit bandwidth you need to cover expenses and finance growth. This is particularly useful for companies with limited funds in the bank and e-commerce companies that are working with small margins. Ramp can assist in both of those scenarios.
2. Expense management
Getting the funds to start and grow your company is only half the equation. Managing those funds by controlling expenses and tracking cashflow is how a company reaches profitability. Ramp has the tools to help you do this. We offer real-time expense tracking, spending controls, and API integrations with your go-to accounting software to keep it all in order.
3. Building credit
Utilizing our commerce sales-based underwriting and controlling your spending are two great ways to build business credit. And since Ramp is a charge card, there's no need to worry about carrying a balance month-to-month, incurring interest, or pesky utilization ratios to calculate.
Need working capital to fuel your business? Consider Ramp
Running a business is hard and accessing working capital to help streamline your day-to-day operations can be an even bigger chore. With Ramp, you can access the working capital you need, faster, with our commerce-sales based underwriting process.
Our new offering gives businesses access to credit limits up to 30x higher than traditional corporate cards. And our finance automation platform gives you the tools you need to manage expenses, vendors, bill payments, and more. Learn more about Ramp today.