Thinking Outside the Box: Alternative Sources of Financing for Startups

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Grow Your Business Don’t let lack of capital stop you from growing your business. Know your options.

Most entrepreneurs find it difficult to raise enough capital to fund their start-ups. This is especially true for African-Americans and people belonging to other minority groups who have little established income to rely on and sometimes lackluster credit scores. Thankfully, there are now a number of alternative sources of capital for entrepreneurs who cannot tap into the more traditional financing sources. Here are some of them.

Alternative Options for Financing Your Startup
Peer-to-Peer Lending

This alternative financing option has been around for a number of years. This process works by matching people who want to invest with people who want to borrow. Cash flows directly between the borrower and the lender, eliminating the need for a traditional financial intermediary. By cutting out the bank in the equation, borrowers pay fewer fees, get their loans approved faster and get access to the funds quicker. The Lending Club, Prosper, Funding Circle, Upstart, Kiva and Zopa are among the top peer-to-peer lending platforms operating in the US today.

Crowdfunding
Crowdfunding is the process of using the internet to raise money to fund a project or business venture. There are basically two types of crowdfunding – rewards crowdfunding and equity crowdfunding. In rewards crowdfunding, business owners pre-sell a product or service so they can launch their business without incurring debt or selling shares. In equity crowdfunding, entrepreneurs distribute shares in the company in exchange for pledge money. Some of the most widely used crowdfunding platforms in the US include Kickstarter, IndieGoGo, Crowdfunder, RocketHub and GoFundMe.

Merchant Cash Advance Providers

Merchant cash advance providers offer lump sum payments in exchange for a share of future sales of a company.  While traditional merchant cash advance providers charge 30% or more on the money they advance (some even charge as high as 60% to 200% APR), there are now a number of cheaper alternatives that provide funds for small businesses.

Three of the leading companies that figure prominently in the small business financing space include Paypal Working Capital, OnDeck Capital and Kabbage. Paypal Working Capital allows you to borrow up to 8% of your annual Paypal sales and approves the funding in minutes while OnDeck Capital provides loans to US-based business owners who have at least one year of history, more than $100,000 in annual revenues and a credit score above 500. On the other hand, Kabbage uses real-life data as a basis for evaluating your loan, and approves loans within minutes.

There are a lot of ways to raise capital to jumpstart or grow your business so consider these options and pick one that works best for you.