Different Types of Alternative Financing Services for Small Businesses
Crowdfunding is becoming an increasingly popular method of raising capital for small and medium-sized businesses in the United States and around the world. Unfortunately, many of the people who use this method of raising capital are not aware of its benefits or how to find legitimate sources for funding. Crowdfunding can be a very useful tool for entrepreneurs, but it can also lead to a lot of wasted time and money if the crowd doesn’t want to help.
Crowdfunding, or alternative funding services, refers to methods of raising capital that is undertaken outside of traditional credit unions or banks. This can also refer to online fundraising campaigns or other mechanisms where the potential grant recipient can’t access capital until a certain amount of time has passed.
Some of the most common sources of Business capital loans for companies in the U.S. include angel investors, venture capitalists, and insurance providers. Although some of these sources of capital have become more popular recently, others have not been as successful. The following Crowdfunding methods should help you find legitimate platforms for funding:
Purchase Order Funding: This is one of the most commonly used forms of alternative funding services for small businesses. This is where an investor provides capital to a small business in exchange for an option to purchase a product or service from the business at a later date. Investors typically need to purchase a percentage of the stock or other tangible assets owned by the small business to exercise this option.
The great thing about purchase order funding is that it can often be obtained without a lot of documentation because companies rarely actually receive any funds until they reach a specific sales figure. However, many of the risk factors associated with this type of financing can make it a poor fit for certain kinds of businesses.
Seed Investing: Seed investing is another of the many different methods of alternative financing services for small businesses. Seed investing occurs when a private investor invests in a company’s future growth and development.
In many cases, an angel investor will purchase a stake of the company directly, but there are also many cases where private venture capitalists will invest in a series of stock offerings. These are essentially small business loans given to the company at a financial meeting. Unlike other forms of capital, seed investments require the company to perform a significant amount of risk before they receive significant rewards.
Bootstrapping: This is a form of investment that many new small businesses use in their early days of operation. Essentially, it is a form of business financing known as a “private placement” in which the founder of the business makes an initial commitment of capital to the business to keep it operating in the absence of outside financing.
There are many advantages to bootstrapping, including the fact that it can provide immediate cash to the company, but it also comes with significant risks. As with many forms of alternative financing services, bootstrapping should not be used to obtain large amounts of capital, but rather should be used to provide relatively small amounts of funding to keep the business afloat until it has raised enough capital to operate on its own. One disadvantage of this type of funding source is that it usually requires the company to secure an angel investor to act as an entity in the offering.