7 Creative Financing Options for Local Businesses in 2021

This is a contributed article from Samantha Novick, a senior editor at Funding Circle.

Once upon a time, traditional bank loans were the way to finance your business. Fast forward to 2021, and local businesses are finding new and creative ways to raise capital.

These loans empower alternative lenders to accommodate a broader range of companies and use cases. However, they may not be the right fit for every business. 

Whether you're a local restaurant looking to fund your opening or an older barbershop that needs to finance repairs and updates, there are ways to fund your business that don't include banks or 5-year terms.

Below, are some less-traditional ways to fund your business.

7 Creative Financing Options 

1. Small Business Grants

Grant financing sometimes gets bundled with small business loans, but the two aren't the same. A loan lets you borrow a lump sum of cash that you'll repay (with interest) over a set period of time. A grant provides your business with free money (no interest, no repayment) to tackle a specific problem or initiative.

In simple terms, a grant is free money. While small business grants can be extremely competitive, they're worth the effort!

Federal and state agencies, private companies, and local communities offer small business grants. Some of the grant qualifications are hyper-specific, meaning you'll have a good shot at earning one by simply meeting the eligibility criteria.

For example, the 2501 Grant (run by the U.S. Department of Agriculture) offers small business grants to veteran farmers and ranchers looking to grow their agriculture businesses.

Need more business grant ideas? Visit this page to find grants for local, women-owned, and minority-owned businesses.

2. Crowdfunding

Crowdfunding turns the people in your community into everyday investors who can help bring your business ideas to life.

Crowdfunding disperses risk for everyone. Instead of asking one bank or investor for thousands of dollars, you ask thousands of people for $5, $10, or $25. With tiny investments, there's no risk to your backers.

If you're interested in finding crowdfunding, check out the following platforms:

• Kickstarter: Kickstarter will take a 5% cut from your total project funding, but they give your business thousands of eyeballs. Almost 200,000 projects have successfully raised money on Kickstarter, involving 20 million backers donating over $5.5 billion. However, Kickstarter will make you stretch—you only get the cash if and when you reach your campaign funding goal.
  
  
• Indiegogo: Indiegogo also charges a 5% fee. Indiegogo doesn't make you wait to hit your funding goal to access the financing. However, it'll retain a small amount to ensure you can make refunds if necessary.
  
  
• GoFundMe: GoFundMe is typically used for individuals and personal causes, but founders can still use the platform to request community financial support. Unlike Kickstarter, you don't need to reach your campaign target to access the pledged funds.

Crowdfunding is a double-edged sword. On the one hand, it helps you raise money and markets your local business. A successful crowdfunding round can leave you with 100% equity in your business, adequate financing, and a brand-new community of interested buyers.

However, Kickstarter and Indiegogo pledgers aren't entirely altruistic—they expect backer rewards and recognition.

3. Vendor Financing

Instead of asking a bank for money to buy specific goods or services, skip the middle person and go straight to the source. Vendor financing is when your vendor supplies you with the products you need in advance in exchange for paying at a later date with interest.

Vendors understand that 2020 was a rough year, and 2021 is going to have its bumps, too. If you have a long-standing relationship, there’s a good chance they’ll be willing to help you out.

Vendor financing can be structured in many ways. Negotiate with your vendor to determine the lending terms that will be the most beneficial to both parties.

4. Invoice Financing

Invoice financing (also known as accounts receivable financing and invoice factoring) is when you trade your unpaid invoices for immediate cash. This is a great financing solution if you have a lot of cash tied up in IOUs.

IOUs are still considered assets, but they don’t help very much when it comes to paying your own expenses and covering gaps in your cash flow. Fortunately, invoice financing liquidates the invoices to give you the financing you need as soon as possible.

A lender typically will pay you an advance of up to 85% of the value of your invoices. Then, they’ll work with your clients to collect the rest of the money owed to you. After the lender collects the money, they’ll subtract their own fees and send you the remaining balance.

5. Microloans

Microloans are like your typical term loan—they just tend to have smaller lending amounts and shorter repayment terms.

The beauty of a microloan is that you can find just the right amount of financing to cover whatever you need. Most banks won't entertain a business loan for a couple of thousand dollars—it's too small to be worth their time. However, you can find microloans for practically any amount less than $50,000 (the SBA will lend as low as $500).

This type of minimal financing is perfect if you need a bit of cash to support your cash flow during a slump or to cover a much-needed repair.

6. Your Personal Assets

Don't forget that you can leverage your personal assets to fund your business. Think about what you own that's worth a fair amount of money, that could become an investment in your business..

Do you have a boat you no longer use? What about stocks? Even that box of rare Pokemon cards that are in your attic somewhere?

Sometimes, you have the money you need tied up in your personal assets. Before turning to additional financing, consider other assets that you can afford to sell.

7. Friends and Family

While some say it's best to keep your personal and business life separate, your friends and family can be a good resource. Just make sure to maintain professionalism. 

Present a formal business plan that outlines how you intend to use the funds and how the arrangement is structured. Are they offering you a loan? Is it a donation? Or are they expecting equity in your business? Answer all these questions from the get-go to avoid unpleasant surprises in the future.

Be realistic with your expectations, and don't over-promise. Handled correctly, you can successfully finance your business with funds from family and friends.

Inspiring Stories

You don't need an angel investor or a massive loan to find business success. Sometimes, you just need a great idea, patience, and a tiny bit of cash.

For inspiration, look at these legendary successes that bootstrapped their businesses from nothing to notoriety, including:

• Patagoina: Yvon Chouinard started Patagonia in a junkyard buying used equipment to test out his ideas. Now, Patagonia's worth over $1 billion, and it stays a privately-held company to maintain control over its environmental activism roots.
  
  
• SPANX: Nobody believed in SPANX's founder, Sara Blakely. Without a marketing budget, she sold her initial products by going door to door. Sara went on to become the world's youngest female billionaire and owns an incredible 100% of SPANX.
  
  
• GoPro: Nick Woodman had a brilliant idea for a camera that would empower athletes to capture fantastic photos and videos while out and about on their own. He raised his company's first $100K by selling bead and shell belts out of his van while living in his parent's house. GoPro went on to become valued at over $11 billion at its peak.
  
  

Conclusion 

As a small business, there are alternatives to financing. While getting a traditional bank loan can be difficult, you don’t need a perfect credit score or three years of operations under your belt to fund your business. As shown above, there are several financing options available to local businesses just like yours. 

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