What is alternative funding source

6 alternative financing options that you should use for your company too

An overview of alternative forms of financing

In addition to bank loans, promotional loans and innovation-driven financing such as business angels or venture capital for your start-up or as a financial addition to your credit line, you can use special financing options. The alternative forms of financing that are most common and that are to be examined in detail here include:

  1. Factoring
    Factoring ensures liquidity and can thus significantly reduce costs, for example in the case of an overdraft.
  2. Purchase financing
    Pre-finance your goods and skilfully close liquidity bottlenecks.
  3. leasing
    A widespread form of financing. Leasing has a neutral effect on the balance sheet, so the company's financial leeway remains intact.
  4. Convertible loan
    This financing option is one of those in which the lender, in addition to the usual interest on the loan, also participates in economic success.
  5. Funding from the crowd
    In crowdfunding and crowd investing, you can have the masses support your project.
  6. Prize money in start-up competitions
    Competitions for founders not only attract with prize money, but also provide additional awareness for your company.

1. Factoring as a financing option

Factoring as a form of financing is very simple: Instead of waiting for your customer to pay his invoice in two weeks, you sell the customer invoices to a factoring company at a discount. Factoring is particularly effective when you generally grant your customers long payment terms. If you are 100% factoring, you will practically no longer have any outstanding customer invoices.

In addition, the factoring company pays even if your customer exceeds payment terms. Even if your customer goes bankrupt, you won't suffer any defaults through factoring that could get you into trouble. Because the factoring company also takes on the risk of payment default.

Factoring is especially effective when your business is growing. Because without factoring, the number and amount of your outstanding customer invoices also increase with the growth in sales. We are also talking about customer requirements here. Factoring is therefore an exciting instrument for financial planning and for your liquidity management.

Because factoring is a form of financing that works by selling your customer invoices, factoring is also known as pre-financing for invoices. For you as the founder, this financing instrument is classified in the area of ​​accounts receivable. You have to decide in your accounting department whether you want to use this tool in the processes in this area.

At Für-Gründer.de we show you everything you need to know about factoring as a form of financing:

  • How does factoring or pre-financing of invoices work in detail?
  • What forms of factoring are there?
  • What is the difference between real and fake factoring?
  • Which factoring providers are there?
  • What should you watch out for in a factoring contract?
  • Is credit default insurance an alternative to factoring?

2. Purchase financing

After founding, young companies can experience liquidity bottlenecks - for example, when they wait for invoices to be paid, when new deliveries and salaries have to be paid at the same time. Purchase financing is suitable here in order to bridge these bottlenecks at short notice. Here purchases are pre-financed by a donor who also grants a longer payment term. Entrepreneurs gain immediate liquidity and can meet the payment terms of their suppliers. The purchase financing can also be used in addition to existing credit lines.

3. Financing option leasing

With factoring, leasing is one of the most widespread alternative forms of financing. With leasing, assets are not bought but rented.

Leasing is one of the forms of financing where you can choose between different variants:

  1. The lessee looks for an asset and, if the choice has been made between the different forms of financing for leasing, turns to one of the numerous leasing companies.
  2. If the decision between the financing options has already been made in favor of leasing, the lessee can contact the leasing company directly, which specializes in the desired asset.
  3. The sales-and-lease-back procedure is a special form of leasing. Here the leasing company buys an asset from the property of the entrepreneur and leases the same asset back to him.

Leasing has a neutral effect on the balance sheet, so the company's financial leeway remains intact. Furthermore, assets such as machines, systems and vehicles can be renewed permanently. In addition, the total costs are cheaper than other forms of financing.

4. Convertible loan: Financing option between equity and debt

Mezzanine capital, especially convertible loans, is one of the particularly interesting forms of financing for start-ups. This is one of the forms of financing in which the lender, in addition to the usual interest on the loan, also participates in economic success. In return, the lender also bears a greater economic risk with this form of financing than the lender with the conventional forms of financing.

5. Financing options through the crowd

The instruments of mezzanine capital are used for forms of financing via the crowd - i.e. via many small investors using online platforms that serve as a capital collection point. When it comes to crowdfunding, a distinction is made between crowdfunding and crowd investing, with the various crowd investing platforms sometimes using the instruments of mezzanine capital.

At the Equity crowdfunding A distinction is made between the atypical silent participation, the profit participation loan and the profit participation right. The boundaries between these three forms of financing are fluid and depend in detail on the contract design between the company and crowd investors as well as crowd investing platforms.

Crowdfunding however, is perfect for smaller totals. The donors can support companies with very small contributions from one euro. Instead of interest or profit sharing, however, there are so-called thank-you gifts, e.g. the finished product. Thus, there is no debt relationship between the donors and the company.

6. Prize money in start-up competitions

Numerous start-up competitions within Germany make it possible for start-ups to get started without funding. Because the winners of the competitions can look forward to prize money or the active support of professionals. A distinction must first be made between the different types of start-up competition - there are competitions for start-ups in the idea phase, during planning (so-called business plan competitions) and competitions for companies that have already been founded but are still young.

Conclusion: the right financing for your company

Whether you want to use an alternative financing option in addition to an existing credit line or finance your company exclusively with it - there are countless financing options, among which you are sure to find the one that suits your company. Because not every company is the same and an innovative start-up has different needs than corporate succession in medium-sized companies. If the alternative financing options cannot really be combined with your business model, we can also provide advice on classic loan models or online loans for start-ups.

Author: Für-Gründer.de editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.