Non-Traditional Financing
Non-Traditional Financing are less common ways to finance a small business that do not always fit into the typical debt or equity categories.
Examples of non-traditional finance include: Crowdfunding, Bootstrapping, and fundraising.
Crowdfunding
Crowdfunding is a way to access funding that is done by raising small amounts of money from a large number of people or organizations.
There are four types of crowdfunding:
Donation Based Crowdfunding
Donors give money for nothing in return. (Check out GoFundMe)
Reward Based Crowdfunding
Those who donate receive products or services in return. (Check out KickStarter)
Debt Based Crowdfunding
Investors are repaid with interest. (Check out Kiva)
Equity Based Crowdfunding
Investors provide funds in return for shares in the business. (Check out WeFunder)
| Pros | Cons |
|---|---|
| Could build awareness for your brand, especially if the campaign goes viral. | Can be difficult to stand out and attract donors or investors. |
| Could help test your business’ viability before making a big investment. | Fees can be involved, even with donation based crowdfunding. |
Invoice Factoring
Invoice Factoring is when a business sells its outstanding invoices to a third party. That third party (a factoring company) gives the business a portion of the money upfront in exchange for those invoices. Then, it collects payments from the business’s customers and gives the business the remaining balance minus a percentage called a factoring fee.
| Pros | Cons |
|---|---|
| Funding qualifications can be lenient. | Factoring fees can be expensive – often .5% to 5%. |
| May be able to access funding in a short period of time. | The factoring company will often communicate with your customers to collect invoices. |
| Your business may be able to use the funds for a variety of expenses. | Only available for B2B invoices. |
Bootstrapping
Also referred to as self-funding, this is when you leverage your own financial resources, like your personal credit cards, savings accounts, 401(k), or drawing from your home equity.
Opting to utilize personal assets provides the advantage of maintaining absolute control over your business affairs. However, it also entails assuming personal liability for financial risks. Before you commit to fund your business from your own assets, you should speak with a financial adviser, as there could be tax penalties or fees incurred when withdrawing funds from your retirement accounts or other assets
| Pros | Cons |
|---|---|
| Maintain control of your business affairs. | You assume personal liability for financial risks. |