The Ultimate Guide to Alternative Financing

This guide gives you everything you need to know about alternative financing, exploring its use cases, benefits, and strategic applications specifically within debt financing and software financing. Alternative financing is an integral part of a healthy capital stack that helps businesses of any size achieve their goals. 

Alternative financing has emerged as a pivotal complement to bank loans and venture capital, offering diverse avenues for funding without the challenges associated with traditional lending or equity dilution. The guide below will support you in getting started with alternative financing today. 

What is Alternative Financing?

Alternative financing encompasses the many different types of business financing options that support a company through their growth as a supplementary source to their main capital.

Alternative financing includes various sources of funding that don't fall under the categories of venture funding or traditional lending. The goals of alternative financing are to help businesses in three key ways:  

• Capitalize on the money already secured
• Structure strategies and finances for growth
• Access capital that doesn't dilute ownership

Deciding if Alternative Financing is Right For Your Business

Why Use Alternative Financing

Alternative financing tools solve for the challenges businesses might experience with other types of funding. Traditional loans and venture capital can be helpful, but they're not always the best options. Depending on the structure of your business, the timing of the investment, or your overall financial strategy, an alternative financing method might be the best fit.

One of the key challenges with traditional bank loans for early stage companies is that banks will not provide a business with a loan until the business has existed for two or three years. Most businesses will need funding well before they reach their two or three-year anniversary. This time requirement alone often rules out bank loans.

The challenges with venture capital arise from the requirement of a large share of company equity. For any additional VC funding secured, the ownership becomes more diluted.

Alternative financing provides a solution for both of these obstacles. First, alternative financing capital can be accessed by businesses in their early stages. Second, alternative funding can be non-dilutive.

What is the Difference Between Equity and Non-Equity Financing

Equity financing is defined as selling a portion of a company's equity in return for capital. It involves raising capital by selling ownership stakes in a company which dilutes the ownership of existing shareholders. Venture capital is a prime example of equity financing.

Non-equity financing does not require a company to give up shares or ownership in exchange for funding. Instead, this funding option provides access to capital in exchange for a guarantee of repayment plus fees or interest. Bank loans are an example of non-equity financing whereas debt financing is an alternative financing example of non-equity financing.

Types of Alternative Financing

There are many different types of alternative financing options available, so finding the best option for your specific needs is crucial. These alternatives to both bank loans and to venture capital are complementary to your overall financing approach. The most successful companies leverage a combination of the right alternatives to achieve their goals.

Financing Alternatives to Venture Capital

• Angel investors: Providing funding in exchange for equity in the company, angel investors invest their own money based on their risk assessment and often offer favorable terms to help the business prosper.
• Private Equity: Because of the high investment and high expectations for a big return, private equity can be the ideal source of capital for businesses with a clear restructuring plan and plans for rapid growth.
• Crowdfunding: Crowdfunding allows a company to post its fundraising goals and share perks with an audience who invests a small portion of the total funding needed. Crowdfunding can allow thousands of people with private investment funds to contribute.
• Peer Lending: Social lending or peer-to-peer lending allows businesses to borrow money from other individuals and companies. It may take the form of a company partnership and occurs when investors (Peer A) match with companies (Peer B).
• Grants: Non-repayable type of financing that institutions such as government bodies give to organizations to develop their businesses, grants are a source of free money that doesn't require repayment. They can be specific on their requirements of who can apply. 

Alternative Financing Solutions to Business Loans

• Merchant Cash Advances: Merchant cash advances are dependent on negotiating with your vendors. When your vendors have confidence in your company’s revenue stream, they allow you to delay the cost of the resources needed to generate that revenue.
• Micro-financing: Micro-financing is a form of lending in smaller amounts designed for businesses with little to no collateral that cannot access traditional funding. 
• Revenue-based Financing: This alternative financing method is suited for businesses that are already earning revenue. Funding from investors is repaid based on a percentage of the business's gross revenue.
• Invoice Financing: Invoice financing allows companies to borrow money based on their accounts receivable. 
• Equipment Financing: Equipment loans are often financed by specialized online lenders. Online lenders tend to have less stringent requirements but feature higher interest rates. 
• Line of Credit: A line of credit provides a set amount of funds available to a business, but it only charges interest on the amount spent from the credit.
• Software Financing: Software financing is a loan for a specific purchase - software. The money is lent solely to purchase technology. Software fuels growth while also being a major expense, so financing specifically for software and technology purchases can free up cash flow when most needed. We cover software financing in more depth below.

Key Benefits to Alternative Financing Methods

Extended runway 

Alternative financing can be a helpful cash injection that lengthens the amount of time a business can continue to operate. If your initial investment is starting to shrink too quickly, one of these alternative financing options can add time to your runway.

Stabilized burn rate

Alternative funding options can provide more stability. They can turn large, costly up-front expenses into smaller, repeatable payments that make month-to-month financial planning easier and burn rate more predictable.

Improved cash flow

Alternative business financing improves cash flow by providing an infusion of capital and turning larger expenses into smaller monthly payments. The positive impact will vary based on which alternative financing method you choose, but the overall result is more liquidity in cash flow.

Non-dilutive 

While some alternative financing methods are equity-based, with non-equity financing businesses don't have to give up a portion of ownership or dilute current shares to receive capital. 

Why Debt Financing is a Good Alternative Financing Option for Businesses 

What is Debt Financing

Debt financing is a type of alternative financing that is based on taking out debt to finance your business growth. You leverage debt with the agreement to pay it off in the future with your revenue. Debt financing helps you access many of the resources, services, and infrastructure needed to quickly build a strong and profitable company model.

A traditional lending example of debt financing is a bank loan. Alternative financing examples of debt financing include equipment financing and software financing.

Why a Business Should Use Debt Financing

Debt financing can help companies at any stage move quickly and invest in pivotal areas when it's needed the most. When capital efficiency is a focus, leveraging debt can be a great option for fueling growth. Debt can help improve operating leverage by reducing operating costs and increasing margins without diluting ownership.

How to Utilize Debt Financing

To ensure you're set up for success when leveraging debt financing, we suggest following these eight best practices for success in debt financing:

1. Understand your needs: Tools like a gap analysis will help you understand what your company has today, where it wants to go in the future, and what it needs to get there. This will help guide you in identifying the right type of loan and lender, lowering risk.
2. Research your options: Compare the types of debt financing, interest rates, fees, and repayment terms before deciding.
3. Understand the costs: Clarify all costs and fees including interest rates, origination fees, and closing costs. Factor them in to properly calculate cash burn and runway.
4. Have a repayment plan: A clear repayment schedule will help you plan for future expenses and ensure you won't default. 
5. Consider the timing: Align your debt timing with your cash flow and revenue projections. Time debt financing for when you know you'll need additional funds while also having expectations for increased revenue to pay it back.
6. Keep it short-term: Short-term debt provides more flexibility for future financing options versus long-term which ties you down for longer.
7. Use it as leverage: Debt can help you negotiate better deals with your vendors and suppliers by accessing better pricing, terms, and services.
8. Consolidate payments: Using platforms like Gynger allows you to consolidate your many software expenses into one monthly payment.

How to Finance Your Software Spend

What is Software Financing

Most companies are using countless software technologies to scale and grow. From day-to-day operational software to back-end systems powering the actual product, software is the backbone of most companies. It's an important and costly expense, making it one of the most important company expenses to finance. 

Software financing is non-equity financing that provides funds specifically to purchase software. With software financing you can leverage a payment solution to finance your software purchase (or purchases) rather than paying for it in a lump sum payment. The payments are often fixed with lower interest rates when compared to other forms of lending options.

Benefits of Software Financing

You have many alternative financing options to choose from, so it's understandable to wonder why you should include software financing in your overall strategy. The key benefits of software financing include:

• Access capital more quickly - Software financing platforms allow you to access capital more quickly than traditional loans. For example, Gynger issues credit decisions within 24-hours.
• Consolidate software bills - Instead of an inbox full of individual bills each month, Gynger consolidates all of your software and infrastructure subscriptions into one simple dashboard. Your software subscriptions can be rolled up into one payment a month.
• Transform annual subscriptions to monthly payments - Vendors offer discounts for annual upfront payments versus monthly payments. With software financing, you can agree to the discounted annual subscription price, while also getting the benefits of monthly payments. Gynger pays your software vendor the full contract value upfront, and you pay us back later in the payment model that works for you.
• Stabilize your burn rate and improve cash flow - Software financing usually offers fixed monthly installments. This type of financing can make budgeting easier and will help you keep cash flow under control.

How to Use Software Financing

Contract financing grants access to non-dilutive capital to purchase the tools you need while paying for them on your terms. Here are the simple steps to start leveraging software financing:

1. Find a software financing solution and start your application: With Gynger, you can create an account, apply in minutes, and get approved the next day.
2. Select a contract you'd like to finance: Consider your more strategic tools that come at a higher cost but are mission-critical. If your budget could cover the costs monthly but is struggling with the annual commitment, you have found a great candidate. Not sure where to start? Gynger can auto-detect and suggest the best contracts to finance. 
3. Financing partner pays the vendor: Gynger pays your vendor on your behalf.
4. Select a custom payment term: With Gynger, you can spread out your payments over 3-12 months for annual contracts, or 24-36 months for multi-year contracts.
5. Manage all your contracts in one dashboard: Gynger makes it possible to build a custom schedule for all deferred payments through one provider and dashboard, so you can streamline all of your vendors through one platform. 

Why Have a Software Purchasing Strategy

Software can be a major expense, and if not approached correctly, it can cause undue stress on cash flow and shorten runway. Instead of settling on a quick purchase of the most ‘affordable’ software plan, the combination of a purchasing strategy and a financing tool can help secure the best technology with the most financial stability. 

The Importance of Including Alternative Financing in Your Broader Strategy

Alternative financing works best when paired with other business financing options, supporting you to use your funds more wisely. The goal is to have a healthy, diversified capital stack that mitigates dilution and maximizes cash flow.

Debt financing in particular empowers you to make better investments in your business. As you purchase technology to support your current endeavors or to facilitate new growth, those purchases can be done in ways that stabilize your burn rate and improve your cash flow. 

With Gynger, using debt financing for your tech spend means access to flexible repayment terms and the ability to negotiate better deals.

Get started with Alternative Financing

Payment platforms like Gynger make it easier than ever to get started with alternative financing. The entire process can be handled online and approval can happen within 24 hours. 

The first step is to take a look at your current or upcoming software contracts and pick one that would be beneficial to spread out over monthly installments. With alternative financing, you will have streamlined payments, an extended runway, and improved cash flow in your future.

Sign up for free to get started today.