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Most entrepreneurs are familiar with traditional funding methods, such as bank loans, crowdfunding and big-name venture capital (VC). However, not all new businesses are necessarily a fit for those avenues. Many may not have the credit rating or cash flow to qualify for a small business loan -- and it can be tough to attract the attention of large VC forms and crowdfunders. However, there are options beyond these more traditional funding methods, notably revenue-based financing, niche VCs and Opportunity Zone funding.
Revenue-based financing, also known as revenue-based investing (RBI) is when a business owner sells an ongoing percentage of future revenue to a future investor. This percentage, usually around 1% to 3%, will continue until the agreed-upon multiple is reached, typically three to five times the original amount invested. Another non-traditional method of funding is through niche VCs. Unlike the conventional, more broad VC firm, niche or boutique VC has a clientele, portfolio and skill set that are specific to a particular industry, demographic or geographic area. Lastly, some may be eligible for Opportunity Zone funding as a way to finance their business. A Qualified Opportunity Zone, or QOZ, is an “economically distressed community” designated by the IRS. Traditional investment funds can receive tax benefits for investing in businesses in those areas that meet certain criteria. If an eligible business in a QOZ is looking for investors and having difficulty qualifying for a bank loan or attracting VC money, Opportunity Zone Funds can be a good source of capital.
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