Alternative Funding Methods to Grow Your Business

July 6, 2017

Regardless of the size of your company or how long you’ve been in business, at least once you will be presented with an opportunity to grow or take advantage of market opportunities faster than your cash flow or bank account will allow. For some, this may even happen many times.

When such an opportunity presents itself, you have the chance to demonstrate your resourceful, entrepreneurial nature to find creative solutions that enable your business to grow and flourish, letting your business acumen guide you.

Being unable to do this, and subsequently passing on opportunities, will ultimately cost you market share, immediate revenue boosts and long term growth and profits. Your vulnerability will increase, as competitors may capitalize on your weakened position and make a move at the cost of your reputation.

Until recently, there were very limited ways to fund your business growth, and almost all of these involved traditional lending institutions such as banks. But now the game has changed, and there are alternative funding methods for your business growth.

We’ll explore the variations of these financing models and the alternative funding methods that businesses are starting to use more frequently.

Your choices of business funding will fall into one of two categories:

1. Debt financing: you receive a loan product that needs to be repaid, which can accrue fees or interest.

2. Equity financing: you sell a percentage of your business to investors in exchange for up-front capital.

Equity Financing

Equity financing involves giving up a percent of ownership shares in your business in exchange for capital.

There are several key benefits to this type of funding, namely: you have no obligation to repay the financing, you have no debt suffocating the business, and experienced shareholders may increase the value of your company. However, there are two important considerations to this form of funding that should be noted:

• The investors are not simply financiers. They are now partners and shareholders in your business who can weigh in on business decisions.
• Regardless of profits, shareholders will always receive their percentage, unless they decide to sell their shares. If the business has grown, you could end up paying far more than the price at which you sold the shares, in which case you will likely have to pay them substantially more to buy the shares back.

Here Are a Few of the Typical Types of Equity Financing

Cloud Financing

Similar to crowd financing (see below), cloud financing involves is a form of alternative funding from individuals forming one collective (similar to a special-purpose vehicle); however, this takes place on the Internet. Previously, this type of investing was only available to venture capitalists and high net worth individuals.

Partners

Taking on a business partner is another way to use alternative funding to finance your business growth, but it’s important that everyone has the same vision for the growth and direction of the company. Partners can be active and bring talent, experience and a network for growth. Conversely, they can also be silent, and simply provide financing, but no operations input.

Venture Capitalists

Venture capitalists usually invest in start-ups with high growth potential or businesses under five years old. They will often invest heavily, and in exchange will want a controlling share in the business. As a condition of providing financing, they will often require that new management team be put in place, including replacing the CEO and managing director. They will often want to exit in a relatively short time after significant uplift in the value of the company.

Angel Investors

Angel investors are generally wealthy individuals or high earners who want to invest to either:

• Make their money work harder for them. They want a better return on their savings than can be achieved in the bank.
• They are able to take advantage of tax benefits in exchange for investing in qualifying businesses.

Angel investors often take a passive role in the company but may take an advisory role for growth to support the founder.

Self-Funding

Many entrepreneurs will fund their own growth either using personal cash reserves, selling assets or raising funds in the form of personal debt such as second mortgages, credit cards or loans. This strategy does allow them to retain 100 percent ownership and control of the company; however, they are potentially saddling themselves and their company with debt that can some point hinder growth.

Crowd Financing

Thanks to emergence and dominance of “fintech” over the last few years, you can now raise money from many individuals in exchange for an equity share of your business. There are a variety of these alternative funding sites that will allow you to list your business. Some charge an up-front fee, and others will take a percentage of the money raised. Due to the nature of these individuals, they are generally silent partners. You should consider whether you want a partner that can add value, instead of just financing, if you are giving up a share of all future profits.

Debt Financing

Unlike equity financing, debt funding doesn’t require you to give up a percentage of profits or any share in your business. It is carried out entirely in the basis of repayment in full plus interest, and usually fees.

These loans will be underwritten on the the basis of your trading history, profitability, credit score and perhaps other factors; likely you will be assessed as an individual along with your business. For the duration of the debt, you will have to pay the interest plus make capital repayments at least on a monthly basis, and you may have to provide some assurance or security for the lender. These forms of security can include personal guarantees, secured against personal assets, third-party guarantees or director’s guarantees.

Banks

Banks, especially the bank you carry out your day-to-day business banking, may provide you with some debt facilities- either personally or in your business name- assuming you have a favorable history with them. These will often be via credit cards, overdrafts or small business loans. The application process can be arduous; however, once approved the funds are available until you reach the limit.

Small Business Loans

When you are applying for a small business loan, be sure to do your research. You will see a plethora of options available from a wide variety of institutions, each with differing terms and requirements. These might have better terms and require less security, or there could be no difference at all between these and bank loans. Doing research is a necessity.

Invoice Factoring: the Flexible, Straightforward Option

The final form of alternative funding is known as invoice factoring, and is an evolution on debt financing.

Also referred to as accounts receivable financing or receivables financing, invoice factoring is a straightforward form business financing that many B2B companies use to gain quick access to funding and cash flow. The process with invoice factoring is simple. A business sends its invoices to a factoring company that provides an advance on the invoice total. The factoring company then waits for customer payments. When payment is received, the business is provided the remaining amount of the invoice, less a factoring discount.

If you are looking for the top choice among factoring and alternative funding companies, look no further than Scale Funding, where we make the process simple and the financing custom to fit your needs. We even offer month-to-month programs for businesses with fluctuations in revenue.

About Scale Funding

Scale Funding is an invoice factoring company serving businesses across the United States. For more information on factoring, call (800) 707-4845 for a free, no-obligation consultation and quote.