2024 Funding Guide: Top 7 Loan Alternatives for Startups

Loan Alternatives for Startups

Getting money to start a business is a critical issue that entrepreneurs have to deal. Sometimes the landscape seems so uncertain that a lot of them think of paying astronomical taxes to get the capital and get the idea off the drawing board.

But beyond traditional bank loans, there are a lot of loan alternatives for startups waiting to be explored. This guide will show you different funding options, empowering you with more knowledge to unfoggy the landscape.  Therefore, you’ll have more resources to think about which alternative may fit your business.

From innovative crowdfunding to strategic partnerships with angel investors, we’ll delve into the diverse funding ecosystem, equipping you with the knowledge to make informed decisions.

For startups and companies looking to get money to fund their business, there are many different options. While not every option may be best suited for every company, understanding each will help to choose which one is best for them. 

Family and friends

In the early stages of seeking loan alternatives for Startups, investment from family and friends can be both a simple and safe solution. Since family members and friends likely want to see you succeed, they are potential sources of funding.

Unlike traditional investors, family and friends do not need to register as an investor to donate. It is also likely that through this method, founders may not have to give up some of their equity. This allows them to retain control over their company. 

Angel investors

Angel investors and angel groups can also be a source of getting capital to fund your business.  Angel investors can be either non-accredited and accredited investors, for accredited investors there is an additional step to meet SEC regulations to make sure they have been verified. Angel groups are multiple angel investors who have pooled their money together to invest in startups. Typically, angel investors invest capital in exchange for equity and may play a role as a mentor, anticipating a return on their investment. 

Venture capital

Venture capital investors are SEC-regulated and invest in exchange for equity in the company. However, they are not investing their own money, rather investing other people’s. Since venture capital investors are trying to make money from their investments, they typically prefer to have some say in the company’s management, likely reducing the founders’ control. 

Strategic investors

Strategic investors may also be an option for companies. Typically owned by larger corporations, strategic investors invest in companies that will strengthen the corporate investor or that will help both parties grow. Strategic investors usually make available their connections or provide other resources that the company may need. This makes them our forth alternative to loans for startups.

Startup accelerator programs

Another way to get money for your business without getting a loan, is through startup accelerator programs

For some companies, crowdfunding may be useful for raising money. With this method, companies can either offer equity or rewards to investors, the latter allowing the company to raise the money they need without giving up control of the company. 

Getting capital to fund your business: Regulations for crowdfunding

Through the JOBS Act, the SEC passed Regulation A+ crowdfunding, which allows entities to raise up to $75 million in capital from both accredited and non-accredited investors. Crowdfunding gives access to a wider pool of potential investors, making it possible to secure the funding they need through this method. 

Alternatively, Regulation CF may be a better fit. Through RegCF, companies can raise up to $5 million, during a 12-month, period from anyone looking to invest. This gives an important opportunity to turn their loyal customers into shareholders as well. These types of offerings must be done online through an SEC-registered intermediary, like a funding portal or broker-dealer.

In the March 2021 update to the regulation, investment limits for accredited investors were removed and investment limits for non-accredited investors were revised to be $2,500 or 5% of the greater of annual income or net worth. It is also important to note that now, issuers (those seeking funding) can now “test the waters” to gauge interest before registering the offering with the SEC. Additionally, the use of special purpose vehicles (SPVs) within RegCF offerings was permitted.

Regulation D is another method that private companies can use to raise capital. Through RegD, some companies are allowed to sell securities without registering the offering with the SEC. However, if you choose to raise capital through RegD, you must electronically file the SEC’s “Form D.” By meeting either RegD exemptions 506(b) or 506(c), issuers can raise an unlimited amount of capital. To meet the requirements of the 506(b) exemption, companies must not use general solicitation to advertise securities, can raise money from an unlimited number of accredited investors and up to 35 other sophisticated investors, and must determine the information to provide investors while adhering to anti-fraud securities laws. For 506(c) exemptions, companies can solicit and advertise an offering but all investors must be accredited. In this case, the company must reasonably verify that the investor meet the SEC’s accredited investor requirements  

Direct offerings

Another loan alternative is to utilize direct offerings to raise money. Through a direct offering, companies can issue shares to the company directly to investors, without having to undergo an initial public offering (IPO). Since a direct offering is typically cheaper than an IPO, companies can raise funding without having major expenses. Since trading of shares bought through a direct offering is typically more difficult than those bought in an IPO, investors may request higher equity before they decide to invest. 

Security tokens

Companies can offer security tokens to investors through an issuance platform. Companies should be aware that these securities are required to follow SEC regulations. It is becoming more common for companies to offer securities through an issuance platform, as it allows them to reach a larger audience than traditional methods. This is also attractive to investors, as securities can be traded in a secondary market, providing them with more options and liquidity for their shares. 

Getting funds with a broker-dealer assistance

Additionally, companies looking to raise capital can do so with the help of a broker-dealer. Broker-dealers are SEC-registered entities that deal with transactions related to securities, as well as buying and selling securities for their own account or those of their customers. Plus, certain states require issuers to work with a broker-dealer to offer securities, so working with a broker-dealer allows issuers to maintain compliance with the SEC and other regulatory entities. This makes it likely that a company raising capital already has an established relationship with a broker-dealer. 

Funding through website

Lastly, companies looking to raise capital can do it directly through their website. With the KoreConX all-in-one platform, companies can raise capital at their website, maintaining their brand experience. The platform allows companies to place an “invest now” button on their site throughout their RegA, RegCF, RegD, or other offerings so that potential investors can easily invest. 

Whichever loan alternatives for startups you choose, it must make sure that it aligns with the company’s goals. Without understanding each method, it is possible that founders may end up being asked to give up too much equity and lose control of the company they have worked hard to build. Companies should approach the process of raising capital with a strategy already in place so that they can be satisfied with the outcome. 

*Disclaimer: This article was last reviewed in January 2024. Please note that regulatory landscapes and requirements are subject to rapid changes. The information provided here is reflective of the early part of 2024.