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8 Alternative Funding Options for Small Businesses

Makenna Crocker

6 min. read

Updated December 20, 2024

Having a multimillion-dollar idea for a new company or a startup is great, but do you actually have the money to start it?

You will most likely need a website, a technical team, a space to work from, and enough cash to pay your utilities while you embark on this new venture. All these requirements need to be financed.

Whether it’s a pop-up shop, a cool new app, or a clothing line, the majority of entrepreneurs depend on a small amount of funding to get off the ground initially. Most opportunists are likely to dip into their pockets to keep their startup alive and kicking, but what do you do if your wallet is empty? 

Fortunately, we live in an age where innovation is encouraged and there are a multitude of funding options and resources to help keep your startup afloat. Let’s look at a few of the most common types of alternative funding.

What is alternative funding?

Simply put, alternative funding is gaining financing for your company outside of traditional bank loans to gain capital. Many of these alternative sources exist online, and you may consider pursuing this funding route if you’ve been turned down for loans in the past, have poor credit, or are unsure of how much funding you really need for your business. 

But understanding and navigating your alternative funding options can be complicated. To help you find the best funding to fit your needs, read on for the top 8 alternative financing options.

1. Bank financing

Wait, didn’t we just say that alternative funding doesn’t include bank loans? While you may be familiar with (and looking to steer clear of) commercial loans, there are still more attractive options offered to gain capital from banks. SBA loans, credit unions, and Community Development Financial Institutions all act as alternatives to typical bank loans. 

These loans and funds are set aside specifically for small businesses and entrepreneurs. Typically, they also offer more attractive terms and less severe penalties which can be beneficial for startups that are just starting to navigate their financial needs. With these forms of loans, it is important that you have a solid business plan in place before applying. 

2. Grants

A business grant is a specific type of grant provided to businesses, often small enterprises or startups. These grants are awarded by governments, corporations, or foundations to stimulate economic growth, promote innovation, and support the development of certain industries or communities. Businesses can use these funds to start up, expand, implement new technologies, or create jobs. 

Unlike loans, business grants do not require repayment, but they may come with certain criteria or conditions, such as the need to match funds, create a certain number of jobs, or operate within a specific region.

Because grants are money being awarded rather than simply borrowed, they are much more competitive to receive. But they can be incredibly valuable. If you’re pursuing a grant, government and SBA options are likely the most common but difficult routes to go. However, there are resources like NAV and the National Association for the Self-Employed that can help you discover more open options to help make a grant easier to acquire.

3. Fintech

A recent emergence of financial technology lenders could serve as a beneficial alternative funding route. These lenders typically provide smaller loans, credit options, lower barriers to entry, and function solely online. 

Some notable options include Chime and PayPal, but the trick is to do your research. Each option has its own set of benefits and limitations, which can mean fewer funds available, being tied to a specific lender long-term or even higher interest rates. With fintech, companies can benefit from expanding their finance options, automated accounting, online payments and more. 

4. Crowdfunding

Crowdfunding is another alternative source of funding that is typically beneficial for product launches. This avenue of financing is like launching a promotional landing page to gauge interest; it’s a viable way to test the market. 

Crowdfunding has several benefits, but if you’re interested in going this route it’s important to note that each crowdfunding site differs. Some only allow funding for a limited time, some require you to meet your goal to receive any funds and others serve as long-term community sites. Be sure to read the fine print to really understand that you may get all or nothing if going this route.

5. Peer-to-Peer lending

Peer-to-peer lending is also referred to as social lending which essentially allows individual people to borrow and lend money to and from one another. Think of it as a combination of crowdfunding, loans, and angel investment. 

There are several online platforms that act as pitching services to connect you with investors for funds and insight or reach a community of like-minded individuals interested in investing. This form of funding tends to be more useful for established businesses that are looking to grow and typically requires a thorough pitch deck to showcase.

6. Venture Capital and Angel Investment

Venture capitalists and angel investors are firms or individuals that are willing to pump funds into startups. They are typically looking for a return (you would need an exit plan or growth plan) or a share of your business. 

This kind of funding is very applicable for specific industries (ie. tech, medical, online) and usually require your business to be somewhat disruptive and primed for growth. If this route seems like a good option for you, then a solid business plan and pitch deck are vital here.

7. Pitch competitions

This is another unique funding option that is really primed for startups or those working within an incubator or accelerator program. Pitch competitions typically require you to be located within a specific region, be at a specific revenue stage, or be part of a cohort of entrepreneurs. 

This form of funding is particularly beneficial for those with an established business looking to grow and is a great way to gain exposure for your business. Don’t be discouraged if you’re not a tech or medical startup. Depending on where you’re located, there are often regional or community-driven pitch contests that occur from time-to-time.

8. Bootstrapping

This traditional way of alternative funding basically consists of doing everything you can to acquire funding. While all of the options listed above are still viable, you will likely find yourself doing some sort of bootstrapping to prepare your business financially. 

Consider funding from friends and family, service or product presales, using your savings or selling assets, and even looking into lines of credit. Bootstrapping is really something every business owner should do to help feel out the early stages of understanding how much funding you need to operate. It encourages lean operations and can help you avoid taking out too much funding early on.

All types of funding require preparation

Seeking funding for your business in the more traditional style of bank loans can be challenging, and these alternative funding options can help you save time and rejection along the way. No matter the funding options you choose, it’s important to have a solid business plan to back up your business and better your chances of acquiring funds. 

You can download a professional and impressive business plan for free with our Business Plan Template. And if you’re looking for a simpler method that can help you with business planning, pitching, budgeting, forecasting, and performance tracking for your business, check out LivePlan today.

Makenna Crocker

Makenna Crocker is the Content Marketing Strategist at Palo Alto Software. Her work focuses on market and social trends, educational content creation, and providing entrepreneurs with small business tips and tools. With a master’s degree in Advertising and Brand Responsibility from the University of Oregon, she specializes in generating a strong and responsible brand presence through social media and sharable content.