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5 Alternative Funding for Startups in 2025

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Startups needing funding often have to source financing by untraditional means. This is because getting a traditional business loan often involves a hard credit pull and close review of finances—and since many startups have limited resources, they may have difficulty qualifying for various lending products.

Sourcing alternatives has become a more common way for startups to grow their businesses. So, if you have been unable to get financing from traditional lenders or find that those financing options don’t meet your company’s needs, here are five sources of alternative financing for startup businesses:

– Friends and family: Best for borrowers with friends and family willing and able to invest in the company
– Small business grant: Best for business owners looking for funding that does not require repayment
– Crowdfunding: Best for startups with a strong brand or dedicated customer following but low revenue
– Angel funding: Best for startups willing to trade equity in exchange for funding from nonprofessional investors
– Venture capital: Best for startups willing to trade equity in exchange for funding from professional investment firms

### 1. Friends and Family

Friends and family may be a solid financing option if they have the means to provide the funding you’re looking to acquire. You’ll need to make a case for how the funds given will be used toward your business, so I recommend writing a business plan and making a pitch deck to better inform them of how your company operates and allow them to evaluate the potential risks and benefits involved with investing in your company.

Financial assistance can be provided in one of three ways with this route, and each has its own set of advantages and drawbacks to consider:

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– Loans: Compared with getting a loan from a bank, getting financing from friends or family is a less formal way of entering into a debt agreement. Generally, it’s easier to negotiate an interest rate, repayment terms, and other loan terms, such as fees and prepayment penalties. However, the IRS does set minimum interest rates that must be charged.
– Gifts: While receiving funds in the form of a gift can be great as it requires no repayment, the IRS may still view it as taxable income. Since tax circumstances can vary greatly, I recommend consulting a tax professional if you’re concerned about being left with an unexpected tax liability as the result of a gift.
– Equity: Receiving equity has the benefit of not requiring any loan repayments. However, be aware that accepting funds in exchange for ownership interest in the company can result in unwanted advice from the new stakeholders and could potentially strain your relationships in the long run.

Funding from friends and family can be obtained from your network of personal and professional connections. For information on getting started, read our in-depth guide on raising money from family and friends to fund a business. There, we cover topics such as how to develop a business plan, how to pitch your business idea, how to determine the funding amount you should ask for, and how to negotiate a business agreement.

Small Business Grant

Small business grants provide alternative financing for small businesses without debt obligations. Since there’s no negative impact on your cash flow, it’s a great option if you’re unable or unwilling to deal with loan repayments. This type of funding, however, can be quite competitive because there are typically a large number of businesses competing for a small number of grants. Grants may only be available during certain times of the year, or on a limited basis. You’ll likely have to prepare a business plan and submit an application that involves various characteristics of your business and your intended use of funds. Even when selected, downsides include smaller funding amounts compared with loans and slower funding speeds. Grant eligibility criteria varies, but some examples of how grant winners are selected can include quality of responses to questions on the grant application, alignment with grant branding, quality and types of business products/services offered, intended use and anticipated impact of funds, business need, and originality of business history.

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Where & How to Get Funding

Small business grants are issued by different types of organizations, including federal and privately owned companies. Check out our list of the best small business grants for a jumping off point. It also contains information on different eligibility criteria, details on how winners are selected, and where to go to submit an application.

It allows you to validate your product idea and build a community of loyal customers before you even launch. Plus, you can offer exclusive rewards to early backers, creating a sense of exclusivity and urgency.

However, keep in mind that if your campaign doesn’t reach its funding goal, you may not receive any of the pledged funds, and you may have to refund any backers who contributed.

Overall, reward-based crowdfunding can be a great way to raise capital for your business while also engaging with your target audience and building a loyal customer base.

Equity-based crowdfunding allows investors to receive equity in your business in exchange for their financial support. This type of crowdfunding is more suitable for businesses that have a solid business plan, a proven track record, and are looking to scale.

By offering equity in your company, you are essentially selling a share of your business to investors. This means they will have a stake in your company and may receive dividends or a return on their investment if your business succeeds.

Equity-based crowdfunding can be a good option for businesses that are looking to raise a significant amount of capital and are willing to give up a portion of their ownership in exchange for funding.

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However, it’s essential to carefully consider the terms and conditions of the equity offering and ensure that you are comfortable with potentially diluting your ownership stake in the company.

Companies also use crowdfunding to gain exposure. This allows them to showcase their products or services to a wider audience and generate buzz around their brand. By engaging with potential customers through crowdfunding campaigns, companies can build a loyal following and attract new customers. Additionally, crowdfunding provides an opportunity for companies to test the market demand for their products or services before fully launching them. Overall, crowdfunding can be a valuable tool for companies looking to raise capital and increase their visibility in the market.

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