10 alternatives to equity crowdfunding
If you’re an entrepreneur looking to raise capital without giving away equity, there are many alternative funding sources you can tap into. While equity crowdfunding is a popular option for startups and early growth businesses, it may not be feasible or appropriate to sell shares to investors at this point in your business’ journey.
Here are 10 alternative funding sources for startups:
- Friends and family
- Startups grants
- Rewards-based crowdfunding
- Angel investors
- Venture Capital
- Bank loans
- Invoice financing for startups
- Revenue sharing
1. Startup bootstrapping
Startup bootstrapping is one of the most common sources of alternative funding. You simply use your own savings or personal credit to fund your venture until you can advance the business to a point where you’re able to attract investors. It’s best suited to very early-stage startups when there are no, or only limited, team costs.
Pros of bootstrapping
- You avoid the lengthy process of finding investors.
- You don’t give away any equity and maintain control of the company, with no requirement to answer to investors.
- You’re forced to get creative with your money and how you use it, which can lead to a strong, lean and efficient business.
Cons of bootstrapping
- No investment capital may stunt your growth potential, restricting your visibility, marketing, and what you can do to serve your customers.
- It’s rarely a feasible solution for investment-heavy industries such as manufacturers or importers.
- Forgoing outside investment could mean missing out on making valuable connections with expert advice and wisdom.
2. Asking friends and family to invest
Another popular form of alternative funding is to reach out to friends and family members who might be interested in investing in your business. Most suitable for seed-stage companies, this can be a great way to get started, particularly if you have a strong support network.
Pros of asking friends and family to invest
- You might be the only asset to the business, particularly at an early stage, so who better to buy into you and your idea than your nearest and dearest?
- If it’s a loan, friends and family are more likely to agree to low interest (if any) and a longer repayment period.
Cons of asking friends and family to invest
- Valuation may be too high and effect future rounds
- Such a personal connection may affect your friends and family’s judgement, so there’s a risk they may offer you more than they can afford to lose.
3. Startup grants
Many organisations offer grants to small businesses and startups that meet specific criteria. These grants are often non-dilutive, meaning you don’t have to give up equity in your company in exchange for the funding. With over £12bn in grant interventions on offer in the UK every year, the application process is well worth the effort.
However, grants tend to be skewed towards job creation, such as industrial sectors, scientific and capital-intensive projects, or improvements to certain areas or regions.
Check out our guide to startup grants, to learn more about how grants work and what’s available.
4. Rewards-based crowdfunding
Rewards-based crowdfunding is not the same as equity crowdfunding. This alternative finance method allows you to offer incentives rather than shares to backers who donate to your business. Rewards can vary from a simple thank you card to free products or services from your startup.
Pros of rewards-based crowdfunding
- The potential to create a loyal future customer base who can promote your business and impart valuable ongoing feedback.
- Increased brand awareness and a great way to pre-sell your products.
- A source of rich market research as you develop products, concepts and strategies.
- A negative cash conversion cycle, meaning you receive money before you deliver any rewards, reducing risk.
Cons of rewards-based crowdfunding
- Once you’ve raised your desired capital, you have to deliver the rewards you promised your backers.
- Unlikely to generate large sums of cash for your business.
- Not suitable for non-consumer projects and products.
5. Angel investors
Angel investors present another alternative to equity crowdfunding. Typically, an angel investor is a high-net-worth individual (or group of individuals) who invests in early-stage startups in exchange for equity in your company.
Pros of angel investors
- Angels are often ex-entrepreneurs or business leaders, so their experience and advice can be invaluable, particularly if their background is in your business area.
- There may be an opportunity to follow on and secure more later-stage capital to support you through your early-stage funding rounds and beyond.
- Angel investors can also be your friends and family, making it easier to raise capital as you already have an established level of trust between you.
Cons of angel investors
- Angel investors often prefer to invest at later stages and can be hard to find.
- Some angels like to be hands-on, so be sure to pick investors you feel you can relate to, have honest conversations with and work with long term.
- Also, an angel investor’s relevant expertise can be a downside if they start to dictate or interfere with your business.
Find out more about how to find angel investors and the UK’s top 25 active networks.
6. Venture capital
Venture capital firms (VCs) are a well-established source of alternative funding for startups and emerging companies. They provide funding in exchange for equity, which means they can be a good option if you’re looking to raise a large amount.
Pros of VCs
- One of the only ways to raise funds over £1m.
- Strong potential for VCs to follow on and put more money into your company in future investment rounds.
- VCs are very well connected.
- Often, you only have one or two investors to deal with.
- They understand the world your business is operating in.
Cons of VCs
- VCs almost exclusively invest in established startups, so aren’t appropriate if you’re very early stage.
- Receiving a large investment from a venture capitalist typically reduces your ownership stake and the control you have over the business.
- VCs may also demand a high level of involvement in your business to help drive growth and see a return.
- The investment process and intricate investment terms to agree are much more onerous than with an angel investor.
- VCs operate on the principle of high risk, high reward. However, this risk might mean they take a long time to decide whether to invest.
To understand more about how venture capital fits into the funding mix, read our guide on the differences between VCs, angel investors and crowdfunding. You can also look to raise capital through our VC network, the Institutional Investor Service.
7. Bank loans for entrepreneurs
Traditional bank loans can be a good alternative funding option as they typically offer lower interest rates than other types of loans.
There are two types of bank loan available to startups, unsecured and secured. As the name suggests, an unsecured loan is not secured against your home or business, so the amount you can borrow will be relatively small. The amount and the interest rate you’re offered will depend on your personal credit rating as well as your business’ creditworthiness.
Conversely, a secured loan is secured against your home, investments or business assets. You may be able to borrow a substantial amount, depending on your circumstances and the assets you can put up as security.
Pros of a secured bank loan
- Banks are convenient and familiar.
- You can borrow substantial amounts.
- Many banks have a fixed interest rate and no application fee for the loan term time.
- Suited for startups with reasonable cashflow, as banks prefer to lend to profitable and creditworthy businesses.
Cons of a secured bank loan
- The loan must be secured against an asset, such as property, so if your business fails, you’re at risk of potentially devastating losses.
- Banks are unlikely to want to lend to riskier businesses.
- Banks usually have long lists of prerequisites that a business must meet before they approve a loan, alongside a lengthy application process.
- Some banks charge for early repayment.
- Fixed repayments mean that when cashflow is changeable you may struggle to pay back your loan.
Find out more about other debt-based options for startup capital.
8. Invoice financing for startups
Invoice financing is when a third party ‘buys’ your unpaid invoices from you and then lends you money against their value. This can be a good alternative funding option if your startup has a long sales cycle and needs to use the cash owed by your customers sooner.
There are two types of invoice finance: factoring and invoice discounting.
With factoring, the finance provider lends you money against the value of your unpaid invoices and also collects the money owed to you by your customers. With invoice discounting, the finance provider lends you the money on the same basis, but you remain responsible for collecting payment from your customers, which you then use to repay the loan.
Pros of invoice financing
- You can invest in growth without having to wait for invoices to be paid.
- Rapid access to funds (24 hours in some cases).
- No need to provide any property or other assets as collateral.
- More flexible lending and conditions than banks.
- Interest is only payable on the borrowed amount.
- With factoring, keeping track of invoices and contacting customers is outsourced, freeing you up for more important tasks.
Cons of invoice financing
- It’s not suited to very young companies with less financial certainty.
- Monthly interest payments and service fees can eat into your profits, particularly if you’re a business with small margins.
- Only suitable to address the problem of insufficient cashflow.
- Providers will only lend capital against invoices due from clients or customers they anticipate paying.
- Factoring providers usually collect payments from customers directly, potentially damaging the relationship you have with them.
Crowdlending platforms connect borrowers with lenders who are willing to provide funding in exchange for interest payments. This can be a good alternative finance option if you need a smaller amount of funding than you can get from other sources, or you don’t want to give away equity.
Pros of crowdlending
- Usually quicker and more transparent than getting a loan from a bank.
- You can make contact with and receive feedback from potential customers.
Cons of crowdlending
- It can be expensive.
- You can’t be sure what the final amount of your loan will be.
- It could take a long time to attract enough lenders, so you may have to wait a long time to get your loan or not get it at all.
10. Revenue sharing
Revenue sharing is an alternative funding method that gives investors a portion of your company’s revenue in exchange for their investment, instead of giving them equity.
Pros of revenue sharing
- It allows you to raise money without giving up equity, provided you have a solid revenue stream.
- Your investors’ shared interest in your startup’s success can result in higher productivity and business loyalty.
- Revenue sharing can incentivise partners or investors with useful skills, as it’s modelled on performance.
Cons of revenue sharing
- Not very well established and doesn’t provide a reliable, consistent source of funding.
- Having to prioritise revenue generation risks losing sight of your long-term goals.
- Accounting and reporting revenue shares can be time-consuming, particularly if you don’t have an efficient system set up.
- Harder to attract equity investment as revenue going out of the business.
Which alternative funding route is right for you?
In conclusion, equity crowdfunding is a popular option for raising capital, but it’s not the only one. From bootstrapping to bank loans to revenue sharing, there are many alternative sources of startup funding entrepreneurs can tap into.
Finding the right sources of funding for your startup can have a lasting effect on how your business is run and how it performs. Chances are that over the lifecycle of your business, you’ll use a combination of these alternative funding options and equity crowdfunding, depending on how your business grows and adapts over time.
Should equity crowdfunding become a viable option for your startup, apply to raise with Seedrs. We’ve helped hundreds of entrepreneurs successfully raise funds to take their business to the next level, and it only takes three minutes to apply.