8 types of alternative funding small businesses should consider

Small businesses and startups have always been the backbone of economic growth, but securing traditional bank loans remains a challenge for many. This is where alternative lending steps in, providing innovative solutions that empower entrepreneurs to access the capital they need to innovate, grow, and thrive.

This blog will explore what alternative funding is, its key differences from traditional loans, a breakdown of its most popular types, real-life success stories, and essential tips for choosing the right option for your business.

Understanding Alternative Funding

What is Alternative Funding?

Alternative funding refers to any type of financing that occurs outside of traditional financial institutions like banks. These methods connect borrowers with investors or institutions through unconventional platforms, often involving faster processes, fewer restrictions, and tailored repayment terms. With the emergence of technology and fintech, alternative lending has grown rapidly, allowing small businesses, startups, and entrepreneurs access to funds that banks may have declined due to strict credit requirements or extensive application processes.

Key Differences from Traditional Loans

• Speed and Flexibility: Traditional loans can take weeks or months to process, whereas alternative lending options often approve funds within days or even hours.
• Accessible Requirements: Unlike banks, which rely heavily on credit history, alternative lenders often consider other financial metrics like revenue or invoices.
• Innovative Platforms: Many lending solutions—such as crowdfunding or peer-to-peer lending—operate entirely online, eliminating the need for paperwork-heavy processes.

Now that we’ve laid the groundwork, let’s explore some popular forms of alternative financing.

The Most Common Types of Alternative Funding

1. Peer-to-Peer (P2P) Lending

How it Works:

Peer-to-peer lending platforms, like Upstart or LendingClub, connect borrowers directly to individual investors. Instead of going through banks, you pitch your loan request to potential backers who fund all or part of your needed amount.

When to Consider:

If your business has decent financials but lacks tangible assets for collateral, P2P lending offers fair interest rates and a simplified process.

2. Crowdfunding

How it Works:

Popular platforms like Kickstarter and Indiegogo allow businesses to raise funds by presenting their projects or products online. Backers contribute money in return for rewards, equity, or simply a chance to support your vision.

When to Consider:

If you have a unique product or service with broad consumer appeal, crowdfunding can be an excellent way to raise funds while simultaneously marketing your idea.

Example:

Many startups, like the creators of the Oculus Rift VR headset, raised millions entirely through crowdfunding before receiving major venture capital.

3. Merchant Cash Advances (MCA)

How it Works:

With MCAs, businesses receive a lump sum in exchange for a percentage of their future credit or debit card sales. Lenders like CAN Capital or PayPal Working Capital often approve enterprises in just a few days.

When to Consider:

If your business has consistent sales but struggles with cash flow due to delayed payments or seasonal cycles, an MCA can provide much-needed liquidity.

4. Invoice Financing

How it Works:

Invoice financing allows businesses to borrow money against their unpaid invoices. Companies like BlueVine or Fundbox advance you a percentage of your invoice total, helping ease cash flow while you wait for clients to pay.

When to Consider:

Ideal for businesses that frequently deal with delayed corporate payments, retainers or contractual agreements with long payment terms.

Example:

A logistics company secured $100,000 via BlueVine to manage payroll and operations while awaiting payment from a large corporate client.

5. Revenue-Based Financing (RBF)

How it Works:

With revenue-based financing, lenders like Viceversa or Clearco provide funding in exchange for a percentage of your monthly revenue until the loan is repaid. Ready to explore revenue-based financing? Get Funded with Viceversa and unlock your business’s growth potential today!

When to Consider:

Revenue-Based Financing (RBF) is ideal for digital businesses like e-commerce, SaaS, marketplaces, or subscription services that have consistent revenue streams and require flexible funding without diluting equity. Companies with at least six months of trading history, monthly revenues of €10,000+, and a marketing budget of €10,000+ are well-suited for RBF. It’s particularly beneficial for businesses looking to scale sustainably by investing in areas like marketing, inventory, or operations while maintaining control of their equity.

Some RBF Success Stories

Story 1: Poleepo

A SaaS company, Poleepo, grew their revenue by 250% YoY by harnessing RBF for building their sales team and marketing efforts. They also reduced their churn by 72% by introducing new people in their customer success team.

Story 2: Divani.store

An inspiring success story from the e-commerce sector. Divani.store leveraged Revenue-Based Financing to achieve a +100% increase in new clients in foreign countries, strengthening their marketing and product development efforts.

6. Equipment Financing

How it Works:

This type of financing allows businesses to purchase critical equipment by taking out a loan or lease specifically tied to the item. If the business defaults, the lender repossesses the equipment.

When to Consider:

For businesses in manufacturing, construction, or agriculture, especially if new equipment is vital for growth or operations.

Example:

A small bakery financed a commercial oven using equipment financing, enabling increased production without overextending their cash reserves.

7. Community Development Financial Institutions (CDFIs)

How it Works:

CDFIs focus on lending to underserved communities and businesses with social missions. These institutions, often government-supported, can offer fair-interest loans with less restrictive terms.

When to Consider:

Socially conscious small businesses or startups looking to make a community impact, such as sustainable product ventures.

8. Angel Investors and Venture Capital

How it Works:

Angel investors are individuals willing to provide funds in return for equity or convertible debt. Venture capitalists (VCs) are firms that invest significant amounts in companies with high growth potential.

When to Consider:

Great for ventures that require significant funding and are willing to offer equity in exchange.

Pros and Cons of Alternative Funding

While alternative lending offers undeniable benefits, it’s important to weigh its advantages against its potential drawbacks.

Pros

• Accessibility for small businesses, regardless of credit score.
• Faster approval processes compared to traditional loans.
• Variety of options tailored to specific business challenges.

Cons

• Potentially higher interest rates or fees for some options.
• Some models, like crowdfunding, are not guaranteed (e.g., if the campaign isn’t fully funded).
• Risk of losing equity or assets if terms are not met.

Tips for Choosing the Right Alternative Funding Option

Assess Your Financial Needs:

Are you seeking long-term growth, immediate cash flow, or project-specific funding? Choosing the right model depends on your business goals.

Understand the Terms:

Review repayment schedules, interest rates, fees, and associated risks to ensure the terms align with your financial capabilities.

Research Reputable Lenders:

Stick with trusted platforms like BlueVine, LendingClub, or Kickstarter to avoid predatory lending practices.

Seek Professional Advice:

Consult with a financial advisor or accountant who can help you evaluate your options and make the best decision for your business.

Unlock Growth Through Alternative Funding

Alternative lending is rewriting the rules of business financing, empowering startups and small businesses with faster, more flexible solutions than traditional banks can offer. Whether you’re drawn to the community-driven nature of crowdfunding or the seamless speed of invoice financing, there’s an option to fit virtually any business need.

Curious to learn more? Explore how alternative financing can propel your business forward and find the perfect funding solution today

For more insights on financing options like RBF and how they can positively impact your business, be sure to check out our article, RBF vs. Traditional Funding: Which Is Right for Your Scale-up?

Interested to hear more? Check out Viceversa’s growth platform today.