Alternative fundraising methods for startups: Debt financing, revenue-based financing and more

Time is money in the world of startup fundraising. It goes without saying that one needs capital to launch a company. One of the critical reasons finance is so crucial for businesses is that only specific individuals can access a sizable savings pool.

Even if you believe in what you’re selling wholeheartedly and are willing to devote your time and energy to seeing it through, you may still need financial backing to increase your chances of success. Any business that loans you money will do so for one of four reasons: in return for equity in the business, repayment of the debt, a cut of the profits, or no consideration at all. The scope and nature of the business’s operations will determine the best financing strategy.

It is a safer option to consider alternative startup fundraising methods to secure a bright future for your business in the long term. If you’re wondering whether the benefits of fundraising for startups are worth the hype, this article will give you insights into several alternative fundraising methods so you can make an informed decision.

Alternative fundraising methods

Companies just starting out don’t have to rely on just venture financing. While it is essential for businesses to raise funding throughout the early phases of growth, alternative fundraising methods do exist. As the company’s creator, you need to think of creative ways to bring in funds. One set of financing choices will be available to a larger company engaged in traditional activities (such as retail, manufacturing, or the provision of fixed assets) while another set will be available to a smaller company engaged in technology-based activities (such as the provision of innovative solutions).

What does fundraising mean for a startup?

In its most basic form, startup financing refers to the process of gathering the financial resources necessary to establish a new company initiative. There are several methods to do this, but one of the most common is to have a fundraising round. You’ve certainly heard of equity financing as the most typical method. Equity fundraising rounds include offering investors a stake in your business in return for financial backing. If you get financing from angel investors or venture capitalists, they will want a stake in your company in exchange for their money.

It’s crucial to determine the appropriate amount to part with when selling or giving away your company. That’s why it’s important to weigh the pros and cons of all alternative fundraising methods to choose which is best for your company.

Benefits of fundraising for startups

In today’s business world, capital and fundraising are the mainstays that help a company expand. Many of a company’s financial responsibilities fall within the purview of management and need structure. This planning and administration of duties, however, is only possible if sufficient resources are made available. In the same way, the amount of money received in a startup’s fundraising effort corresponds to the startup’s predetermined financial goals. Additional reasons why startup finance and alternative fundraising methods are so crucial are as follows:

• Accomplishing a startup’s financial goal – Every new company has to set and meet financial objectives. Therefore, it is necessary to seek funds in order to do the same. Such a financing procedure should go promptly, allowing for more streamlined financial planning.
• Eradicate roadblocks to progress – All new companies that launch need to make sure they can expand without any problems. The use of funding and alternative fundraising methods may guarantee this. These programs should be tracked on a frequent basis since they are designed to manage a startup’s finances. These efforts to increase capital flow are geared toward eradicating any monetary obstacles that may stand in the way of a startup’s success.
• Keeping up with the fast-paced corporate world and intense competition – The market has become more competitive recently. Therefore, conforming to corporate norms is crucial. Therefore, initiatives aimed at earning money should be pursued so that companies may raise their own standards. Together, funding and alternative fundraising methods help businesses flourish by elevating startups to meet the industry’s toughest standards for success.

Alternative fundraising methods for startups

While accepting outside ideas and input and encouraging innovation may provide considerable benefits, it does not require a loss of ownership. By keeping all of the company’s equity in your hands, you may steer the company in whatever path you see fit without having to answer to investors. There are a number of alternative fundraising methods to raise capital besides issuing new shares of stock.

• Equity-based Financing – Crowd-investing, or equity-based financing, is a method of raising funds from a large number of small investors rather than a single large investor. According to the size of their investment, shareholders may have various degrees of ownership in a company. Equity financing is a way for investors to put money into a company’s early stages, giving them a stake in the company’s success and potentially making money off of the founder’s vision. Under equity-based financing are:
  • Venture Capital – The most common and standard form of financing for startups is an infusion of capital in return for an ownership stake; this stake may be established at the time of investment (known as a “Priced Round”) or postponed until a later investment round (known as “Convertible Notes“). And Convertible Notes may be issued only as an investment tool, or as a debt instrument due on or before the Maturity Date if the Shares have not been converted.
  • Angel Investment – Aside from professional investors whose primary function is to invest as individuals, it is not uncommon to come across an angel investor who writes many tickets, even more so than a large VC due to his smaller investments and quicker decision-making. The investor provides significant value because of his extensive experience working with other start-up entrepreneurs.
  • Accelerators – Accelerators are not the same as venture capital firms. They focus on smaller businesses and provide funding in lesser amounts over the course of a shorter period of time (annually or semiannually). This kind is suitable for early-stage firms that have verified their offering and seek to further develop or advertise it more actively.
  • Crowdfunding – You may use such platforms to solicit funds from the general public in the form of tiny sums. So instead of raising $100,000 from two investors, you may get $500,000 from 200 investors by charging them each $50,000. You may submit your work or concept to one of these sites, and if it is selected, it will be shared with the world. This format works well for new businesses that are either technologically innovative or have a compelling public message.
  • Stock market IPO – Before an IPO becomes widely recognized as an exit possibility, it serves mainly as a funding vehicle to offer liquidity to the firm. Since the company is selling shares to the general public rather than to a select group of investors, this strategy can be seen as both a financing tool and an exit path for the company’s founders and investors, who stand to gain from the price difference between the company’s pre- and post-listing valuations. This funding option is more suited for established businesses than early- or even mid-stage startups.
• Debt Financing – Many individuals may mistakenly believe that borrowing is synonymous with missing revenue or not having adequate liquidity, therefore startups may be hesitant to connect with bankers or borrow since, ultimately, it is a debt – Burden – on the firm. It doesn’t exist on the level of people, businesses, or nations. Here are a few alternative fundraising methods that work with debt financing as their basis:
  • SMEs Loans – It’s the same tried-and-true method of getting a loan from a bank that has been used for decades, but tailored specifically for the SME market that exists in every nation. When compared to other alternative fundraising methods, such as inventories or invoice funding, the interest rate is cheap and there is no need to sell stock. There are a number of drawbacks to this sort of loan, including the fact that not all businesses are qualified to receive one, the existence of interests on outstanding sums, and the intricacy of its processes, which may often take months.
  • Inventory Financing – It’s when a bank pays for your acquisition of goods or services, guarantees your participation in a tender, or provides you with the funds to acquire assets like vehicles, generators, and other pieces of heavy equipment. And the responsibility for the rest falls on your shoulders.
  • Overdraft Financing – You may use this service, which is offered by many banks, to withdraw funds when your checking account balance drops below a certain threshold, or if you have a sudden and unexpected expense. In the event that a check is written to cover the purchase of a vehicle or manufacturing facility but the funds in the associated bank account are insufficient, this feature prevents the check from being returned.
  • Invoice Financing – In this scenario, you don’t need to borrow money to make a purchase since you already have outstanding bills against your customers that are due at a later date. One alternative is to sell your invoices at a discount to a firm that specializes in invoice finance.
• Revenue-based Financing – A method of acquiring money in which investors are rewarded with a share of the company’s continuing gross revenues. Before investing in a company, financiers will evaluate a number of factors, including profit margins, cash flow, sales, growth possibilities, and scalability. When an investor is confident in a startup’s ability to repay the loan, they may provide capital in exchange for interest. Typically, the agreed-upon sum is anywhere from 3 to 5 times the amount spent on the main investment. Here are some examples of revenue-based financing:
  • VCs – The investors in this type of fund, such as Hustle Fund, receive a percentage of the company’s revenue until the company reaches a predetermined “multiplier” on the initial investment. This revenue share may be the only return on the initial investment, or it may be combined with a stake in the company.
  • Banks – It is mostly similar to the VCs. A Merchant Cash Advance, as it is known in the banking industry, does not involve the bank acquiring a stake in the business.
  • eCommerce financing platform – These are the systems to which you may link your online shop. Your sales data is extracted and analyzed, and a risk analysis is performed. then, the financing offer is made dynamically depending on factors like the size and growth rate of your firm. After agreeing to the financing terms, you can get the money in one of two ways: either by opening an exclusive account that lets you put the money toward advertisements or inventory, or by getting a card with money on it that you can only use toward ads. Both scenarios allow for instantaneous money transfers.
  • SaaS/recurring revenue platform – It’s quite similar to the eCommerce financing choice. The main difference is that this one is geared toward businesses that rely on subscriptions to generate income rather than one-time sales.
• Equity-free Financing – For businesses with a social or inventive effect, or depending on the mission and specialty of the funding institution, equity-free financing in any of its forms is preferable. However, in general, it has to have an intended purpose to appeal to the broader public and is best suited for early-stage enterprises. Startups join these events not only for the financial benefits but also for the free publicity and marketing opportunities they provide.
  • Competitions/Grants – These events are organized for publicity reasons by government agencies, educational institutions, non-governmental groups, and occasionally private businesses. The majority of these contests occur as part of larger events that occur on a yearly basis; startups may apply via online submission and are narrowed down depending on criteria.
  • Incubators – They are organizations that give funding or other forms of assistance to startups but do not get any kind of equity in return. Also, their operation is quite similar to that of accelerators when it comes to program design, frequency, and selection procedure with fewer prerequisites and restrictions. Incubators provide a variety of services to businesses, including cash funding, establishment, financial, legal, and marketing assistance, and shared office space.
• Additional Options – Here are a few additional options you can explore other alternative startup fundraising methods:
  • Exit and acquisition – This is not a viable funding option, but an escape strategy. These sites function much like an online marketplace by bringing together prospective buyers and sellers of businesses. On certain major platforms, buyers and sellers use the platform’s integrated capabilities to do the full transaction digitally.
  • Venture building – Parallel entrepreneurship is an established but little-known strategy for launching new businesses. It began 30 years ago but has just recently spread to the Middle East. It’s a business model in which many enterprises with similar characteristics and resources are developed simultaneously in order to save money on individual venture costs and take advantage of synergies between them. Following product development and market validation, the business Builder seeks for Entrepreneurs-in-Residence (EIRs) to lead each business in exchange for equity and compensation.
  • eCommerce rollup – This is a relatively new strategy for acquiring independent retailers and renowned names in the marketplace. The goal of a rollup is to increase the equity value and the exit multiplier of the combined firm by increasing the cash flow and decreasing the expenditures of the combined businesses. Rollups are not a new concept in the business world; they have been practiced in both online and conventional offline markets.
  • Bootstrapping – Financing your business out of its own profits or revenues is called revenue financing, regardless of whether or not it’s profitable. This method is the most difficult, but it also offers the most flexibility and is most shielded from outside parties. A company can self-finance in one of two ways: either by capturing high-profit margins and using those funds to fund its own growth, or, more rarely, by financing itself from its profits despite not being profitable.

Secure funding by getting a valuation from Eqvista!

There is no universally applicable method of providing financing. However, many entrepreneurs need alternative fundraising methods to flourish. To get off the ground, some companies may only need a modest loan, while others would need substantial venture capital investment. Startups need money because they need to find the correct source and comprehend the consequences. At Eqvista, we provide 409A valuation solutions and are delighted to help you and your organization. We have conducted company valuations for a wide range of industries and enterprises. To determine your company’s worth, our professional team will use tried-and-true methods and cutting-edge research. Have queries? Call us now!