Beyond Debt: 3 Sources of New Business Financing That Don't Require Repayment

The financial burden of a new business is a big challenge to overcome. Many small business owners immediately think of getting a business loan when funding their new venture. While there is nothing inherently wrong with this method, it is only one of many ways to fund a startup today.

The process by which new businesses obtain funding has changed. Newer entrepreneurial companies have many funding sources available that do not create a debt obligation or require repayment within a specific time frame. These funding alternatives are extremely useful for a startup that is working to develop its business model, generate income, or obtain credit approval.

This article explores those sources of new business financing that do not require repayment. These financing options do not replace business loans for new LLC structures or SBA loan programs. Instead, they complement them. When used correctly, they can help new business owners reduce borrowing risk and move toward the next level of growth with more flexibility.

What is Non-Repayable New Business Financing?

Before discussing specific options, it helps to understand what non-repayable new business financing actually means. In simple terms, it refers to funding that does not require monthly payments, interest rate calculations, or repayment terms.

This type of business funding for new businesses differs from:

• A small business loan from a business bank

• SBA loan programs backed by the U.S. Small Business Administration

• Term loans or business lines of credit

• Credit cards or microloans

Unlike a traditional business loan, non-repayable funding may not involve underwriting based on credit score, collateral, or guarantor obligations. There are also no fixed rate or variable rate concerns.

That said, these funding sources are not ‘free money.’ Each comes with eligibility requirements, documentation, and a defined business purpose. Many also require reporting or performance milestones.

For start-ups and younger businesses, using non-repayable new business financing in the early stages is typically a good option. It can be used for things like market research, product development and marketing and working capital funding. After cash flow has stabilized, obtaining business loans for new LLC entities or, conversely, obtaining the best loans for small businesses may likely be a better option.

Popular Sources for Non-Repayable New Business Financing

There may be several sources for obtaining business financing that does not need to be repaid. However, small business owners must be aware that there may be lenders that advertise non-repayment but may have unpleasant loan terms, which may severely affect the business finances in future.

Therefore, it is crucial to choose a trustworthy source with favorable terms for new businesses. Following are some popular and reliable financing sources that generally do not require repayments for new business financing:

1. Government Grant Programs

Small business grant programs, especially government grants are one of the most well-known and reliable forms of non-repayable new business financing. In the United States, Government Grants were created to help promote the development of new technologies, create new jobs, and promote public benefit initiatives.

What Government Grants Are (and Are Not)

Government grants are funds provided for specific purposes to business owners or other qualified applicants. Grants do not have to be repaid and are unrelated to any lending activities. The government does not provide grants for the general purpose of starting a business (as a lender), but does provide grants to businesses to carry out specific objectives and purposes.

It is important to note that the Small Business Administration does not provide grants for general small business startup costs. The SBA website clearly states that on their website.

Instead, grants are usually offered through federal agencies for specific purposes and categories of businesses and are listed on the official government portal.

Key Federal Grant Programs for Startups

There are several grant programs specifically designed for new business financing, including:

• SBIR (Small Business Innovation Research)

• STTR (Small Business Technology Transfer)

These grant programs are focused on funding research-based businesses and startups. According to SBIR, participating federal agencies collectively allocate billions of dollars each year to small businesses engaged in innovation.

The SBIR and STTR grants are for purposes unrelated to the purchase of real estate or commercial real estate. The focus of these grant programs is on technology, healthcare, energy, and defense-related activities.

Eligibility and Application Considerations

When acquiring a grant, there are many different types of eligibility requirements. While some grants have eligibility requirements that restrict access to certain industries or types of nonprofit efforts, others may have a combination of requirements such as the requirement to demonstrate in-person presentations and/or provide technical documentation.

Some general eligibility and application considerations include:

• Business plan must be clearly stated;

• Must prove qualified business entity's existence;

• Proven capability to achieve grant goals;

While grants can reduce reliance on business loans for new LLC owners, they are competitive. Approval timelines are often longer than traditional financing options.

2. Corporate Competitions and Innovation Initiatives

Corporate competitions and innovation challenges are becoming a major funding source for new business financing. These programs are increasingly popular among startups seeking non-repayable capital.

Why Corporations Offer Non-Repayable Funding

Large companies sponsor competitions to identify innovative solutions that fit with their strategic vision and create new revenue streams. They offer cash prizes, pilot contracts, or other operational resources instead of functioning as banks or lenders.

This form of business funding for new businesses does not require repayment. It also avoids equity dilution.

Typical Funding Structures

The following are some common components that many corporate competitions may offer to winning participants:

• Cash awards for winning teams

• Grants for pilot programs

• Access to corporate resources or facilities

Although there are often reporting requirements associated with these funds, the majority of corporate competition prize funds are relatively unrestricted in their use.

Unlike a small business loan, there are no down payments, refinance concerns, or interest rate terms. There is also no effect on credit score or cash flow projections.

How Startups Can Participate Successfully

It is more likely for a startup to succeed in a corporate accelerator program if their solution is aligned with what the company is searching for, than if they are large enough for the accelerator. Corporations look for ideas that solve specific problems.

To prepare yourself for success in these corporate accelerator programs, you should:

• Refine Your Business Plan

• Provide a Clear Explanation of Your Business Needs

• Provide Evidence of Early Traction or Proof of Concept

In many cases, the competition funding received by a startup can serve as a bridge between the early experimentation phase and the startup being eligible for the best loans for small business in the future.

3. Rewards-Based Crowdfunding

Reward-based crowdfunding has become a popular way of new business financing in the United States for companies and startups that are consumer-orientated or "direct to consumer" type of businesses.

Crowdfunding Based on Rewards: How it Works

In reward-based crowdfunding, people support or back a project or product by contributing to it. In return, the people typically receive something non-financial in exchange for the amount contributed. Examples are receiving early access to an exclusive product line or merchandise, etc.

Because contributors are not borrowers, this funding does not create a business loan obligation. There are no repayment terms or loan amounts to calculate.

Crowdfunding in the U.S. Market

Crowdfunding platforms such as Kickstarter and Indiegogo operate in compliance with U.S. consumer protection laws and regulations. While success rates vary as the approval process for each is slightly different, but generally speaking, if a potential business has strong storytelling capabilities and market appeal, it has a chance of successfully using crowdfunding as a financing source.

Advantages and Limitations

Crowdfunding as a new business financing option has a positive aspect as it can help entrepreneurs improve cash flow without incurring debt. Additionally, crowdfunding may also enable companies to validate product demand prior to manufacture/scaling.

The downside is that all reward-based crowdfunding projects must deliver on promised rewards in order to maintain the support and trust of the people backing the business. If they fail to do this, it may harm their credibility and limit their future ability to access small business financing.

Reward-based crowdfunding may work well in conjunction with longer-term approaches to financing, such as business loans, to allow for continued growth and development of new LLCs.

How These Options Compare to Business Loans

Non-repayable new business financing and traditional business loans serve quite different roles.

Business loans offer:

• Predictable loan program structures

• Defined repayment terms

• Access to larger loan amounts

SBA loans, including SBA 7(a) programs, are partially guaranteed by the U.S. Small Business Administration. These loans may feature lower interest rates and longer terms.

However, they require underwriting, credit approval, and often a guarantor. Many lenders are preferred lender partners and member FDIC institutions.

On the other hand, non-repayable sources of finance offer a way to reduce the amount of debt that you take on to fund your business. However, the use of non-repayable sources of finance often requires more planning, time and adherence to various regulations.

Conclusion

It is important to remember that the new business financing does not need to begin with a loan. Grants, corporate sponsorship, and reward-based crowdfunding are all viable funding options for startup companies to take on; these options allow businesses to grow responsibly and maintain their ability to make changes.

Business loans, if used judiciously, will continue to be very important to business owners, but the decision to use a loan will depend on the individual business owner and the stage of the business development cycle in which he/she finds himself/herself at the time.

Utilizing all available options allows small business owners to successfully navigate their businesses with confidence, clarity and control.