“Cash is king” is a statement of fact that most entrepreneurs will easily relate with. I dare say that every adult, who is already responsible for one bill or the other, can also relate and agree with it.
In business, cash is so important that it could be the reason a business crumbles. In some cases, funding (another name for cash) could even be the reason a business idea never gets off the ground. Or maybe the reason a business gets stuck in one stage and is unable to scale. To put it simply, funding is crucial for turning innovative ideas into successful businesses. .
While traditional banks have long been a go-to source for business financing, the modern entrepreneur has a plethora of alternative funding options at their disposal. These alternatives offer more flexibility, accessibility, and tailored solutions, making them particularly attractive for startups with unique business models or social missions.
Let’s look at some of them and how today’s entrepreneurs can find them useful.
Peer-to-Peer Lending: Bridging the Gap
Peer-to-peer (P2P) lending platforms have emerged as a dynamic alternative to traditional bank loans. P2P lending connects borrowers directly with individual lenders or groups of investors, cutting out the middleman and often leading to more favorable terms. This method is particularly beneficial for startups that may have difficulty obtaining loans from conventional banks due to lack of credit history or unconventional business models.
Banks are mostly not that adventurous in the kind of businesses they offer funding to, and the simple reason is that they have to be more careful with customers’ money. Individual lenders or group of investors may be more open to unconventional business models, especially if it is in line with their investing direction.
Startups with novel concepts can leverage P2P lending to appeal to a community of backers / investors who share their enthusiasm and vision. This form of lending encourages a sense of engagement and support among investors, potentially leading to longer-lasting relationships. Additionally, P2P lending platforms tend to be more flexible in terms of loan amounts and repayment schedules, accommodating the varying needs of startups. Entrepreneurs will get to see more benefits in this path when they chose to explore it.
Microloans: Small Funds, Big Impact
Microloans have gained traction as a solution for startups in need of smaller sums of money to kick-start their ventures. These loans, typically ranging from a few hundred to several thousand dollars, are provided by microfinance institutions or community development organizations. The accessibility and reduced documentation requirements of microloans make them an attractive option for entrepreneurs who may not qualify for larger bank loans because of the stage they find themselves at the moment.
Startups with unique business models or social missions often find microloans advantageous due to their focus on supporting underserved and marginalized communities. Additionally, the mentorship and training often provided by the microfinance institutions can help these startups navigate challenges and build sustainable businesses over time.
Impact Investing: When Profit Aligns with Purpose
Impact investing represents a paradigm shift in the world of finance. Unlike traditional investing, where the primary goal is maximizing financial returns, impact investing seeks to generate positive social or environmental outcomes alongside financial gains. This funding option is particularly appealing to startups with a strong social or environmental mission at their core. And this is the direction where ‘sociopreneurs’ need to focus their efforts.
Startups with unique business models that prioritize sustainability, social responsibility, or innovation can attract impact investors who are eager to support ventures that align with their values. These investors often provide more patient capital, understanding that the process of achieving social impact may take time. This means that they are not necessarily looking to recoup their investment with 40% profit in the next two years, but are ready to derive more ROI from the impact the business makes in the community. As a result, startups can focus on their long-term missions without being solely driven by short-term financial returns.
Grants: Non-Dilutive Funding
Grants are a form of non-dilutive funding that can be a lifeline for startups aiming to make a difference. I think this is fairly common knowledge to most entrepreneurs, even though not all of them go out of their way to apply for them. Unlike loans or equity investments, grants do not require repayment or relinquishing ownership in the business. They are typically awarded by government agencies, non-profit organizations, or foundations to support projects that contribute to specific societal goals. You do not have to be a sociopreneur to access a grant though. All you need is to look out for NGOs, foundations and government projects that target the sector you operate in.
Startups with unique and impactful business models can benefit greatly from grants, as these funds can help validate their ideas and provide the necessary resources to bring them to fruition. Moreover, securing grants can enhance a startup’s credibility and attract further investment from other sources. Grants may not always come in form of cash alone. Some may also offer trainings and mentorships. Others may offer the entrepreneur some facilities and infrastructure that he needs in business.
Crowdsourcing of funds
This sort of funding would majorly involve putting your business out in the form of products that the public can invest in. We saw quite a lot of crowdfunding in 2018/19, just before the coronavirus hit the world. Unfortunately, the experience of many investors from crowdfunding may not make this a most viable option right now. Quite a number of the agritechs that adopted this method ended up defaulting on payments, and only a few had the integrity to repay the investors their capital. The news is replete with several CEOs and founders that are still on the run after the unfortunate incident.
I think the absence of a monitoring board may have left some of those entrepreneurs to squander those monies. If any modern day entrepreneur wants to adopt this again, he would need to create a structure that allows investors to monitor the company’s activities and get feedback.
And there are lots more. Please chip in any more alternative funding that I may have missed here.
In conclusion, the modern entrepreneurial landscape is replete with alternative funding options that extend beyond traditional banks. Peer-to-peer lending, microloans, impact investing, and grants offer startups with unique business models or social missions a variety of paths to secure the necessary capital. These options not only provide financial support but also enable startups to align their missions with the values of their backers, fostering a stronger sense of community and purpose. As the business world continues to evolve, entrepreneurs are empowered to explore these (and other) innovative funding avenues and pave the way for a more diverse and impactful startup ecosystem.
