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What is alternative financing? (And how does it differ from traditional capital?)
Raising capital doesn’t always mean taking out a bank loan or giving up equity.
Today, a growing number of startups and SMEs are turning to alternative financing to fuel their growth, on their terms.
Alternative financing refers to any funding method that sits outside conventional debt from bank loans or VC equity. It includes tools like factoring, convertible loans, revenue-based financing, venture debt, and crowdfunding.
These alternative finance instruments complement traditional approaches, contributing to a diverse capital structure.
They offer more flexibility, faster access, and less friction. This makes them especially valuable when speed, cash flow, or control matter most.
In this guide, you’ll learn:
- What alternative financing is
- The most common types and when to use them
- How they compare to debt and equity
- Who they’re best suited for
TL;DR
Why alternative financing matters
Traditional funding often comes with trade-offs:
- Bank loans require hard assets and credit history
- VC means giving up equity, control, and time
Alternative financing helps companies bridge the gap. It adds optionality to your capital stack and lets you raise money in a way that fits your business model, and not the other way around.
Popular forms of alternative financing
The modern financing landscape offers a diverse array of instruments for raising capital. Alternative finance instruments are available to companies of all sizes and in all industries.
The choice allows for financing customized to the company's capital needs.
Below, we introduce distinct forms of alternative financing that companies can access.
Factoring: Turn unpaid invoices into instant capital
Factoring allows companies to sell their outstanding customer invoices to a factoring provider in exchange for upfront cash, typically 80–90% of the invoice value.
The provider then collects the full payment directly from the customer and keeps a small fee.
How factoring works
- You sell receivables before they’re due
- You get immediate liquidity
- The factoring provider manages collection and risk
When to use factoring
- You have long customer payment terms (30–90 days)
- Your revenue is growing fast and tying up cash in unpaid invoices
- You want to smooth cash flow without taking on debt
Factoring is widely used in industries like manufacturing, healthcare, and wholesale trade. In Germany alone, factoring volume reached €372.9 billion in 2022 – up 137% from 2012.
Factoring is especially useful for SMEs that want to boost working capital without taking on traditional debt.
Convertible loans: fast bridge funding between equity rounds
A convertible loan is short-term debt that can be converted into equity at a future financing round.
Investors lend you money now, and instead of getting paid back in cash, they receive shares later – often at a discount.
Key features
- No immediate valuation required
- Subordinated loan (investors are last in line if things go wrong)
- Treated as mezzanine capital (a hybrid between debt and equity)
Why startups use it
- Faster than raising a full equity round
- No notarization or heavy admin required
- Often used when raising from existing investors
Advantages
- Startups get capital quickly without pricing the round
- Minimal dilution upfront
- Improves credit rating (banks treat it as equity-like)
- Investors typically have information rights, not decision-making power
Convertible loans are ideal for bridging gaps between funding rounds. They are important if you’re facing a critical growth phase or unexpected opportunity.
Secure your next funding – without giving up equity
Get up to €5M in non-dilutive funding with re:cap. Calculate your funding terms and see how much growth capital you could get.
Calculate funding termsVenture debt: growth capital that extends your runway
Venture debt is a form of growth-focused financing that gives startups access to debt capital, typically alongside or right after a VC round.
Key characteristics
- Follows equity rounds (e.g. after Series A or B)
- Used for hiring, expansion, M&A, or marketing
- Requires monthly repayments with interest
- Typically includes covenants, warrants, or collateral
Interest rates range between 8% and 20%+, and venture lenders expect repayment over 12-48 months. Venture debt is common in the U.S. and growing across Europe via both public and private lenders.
Who it’s for
Growth companies and startups with:
- A working product and early revenues
- Recent equity investment
- A focus on capital-efficient growth
Venture debt helps extend your runway without further dilution, but it adds fixed repayment obligations, so solid revenue visibility is key.
Leasing: finance what you use, when you need it
Leasing lets businesses rent high-cost assets (think: machinery, vehicles, or IT infrastructure) without tying up capital.
You pay regular installments (monthly or quarterly) and return or buy the asset at the end of the term.
Types of leasing
- Finance leasing (full amortization): Lease fully covers asset cost and fees
- Partial amortization: Covers only part of cost; contract can be extended or bought out
- Operating leasing: Short-term use, e.g. seasonal needs
- Sale-and-lease-back: Sell owned assets to raise cash, then lease them back
- All-in leasing: Includes maintenance, repairs, and insurance
Why leasing works
- Balance sheet neutral: No impact on equity ratio
- Tax benefits: Lease payments reduce taxable profits
- Predictable costs: Fixed rates aid planning
From hardware to software to cloud licenses: leasing is a go-to tool to preserve liquidity and stay asset-light.
In Germany alone, leasing volume hit €66B in 2022, covering over 90% of leased items.
Crowdfunding: raise capital from your community
Crowdfunding allows companies to raise capital from a large number of people who each contribute small amounts, often through online platforms.
How it works
- Supporters back your project in exchange for a reward (e.g. product sample)
- Equity-based crowdfunding offers investors mezzanine capital in return
- Platforms handle payment, legal setup, and communications
Equity crowdfunding instruments
- Participation certificates
- Silent partnerships
- Participatory loans
When to use crowdfunding
- You have a strong brand, product story, or customer base
- You want to raise capital while boosting visibility
- You’re pre-VC or not ready for institutional funding
Equity crowdfunding bridges the gap between friends-and-family funding and traditional angel or VC rounds, and it comes with valuable marketing exposure
Alternative debt financing: modern, data-driven funding
Alternative debt financing refers to non-dilutive capital solutions offered by fintech lenders and specialist funds.
These solutions rely on your financial metrics, not personal guarantees or hard assets. This way, capital requirements precisely align with the company's business plan.
What alternative debt financing instruments have in common is that they do not dilute the shares of existing shareholders or reduce their influence on the company. This type of alternative finance is also offered by re:cap.
What sets it apart
- Backed by financial performance, not collateral
- Funding is tailored to recurring revenue, CAC, and cash flow
- Repayment terms can be flexible, tied to usage or milestones
- No warrants, no board seats, no dilution
The use cases of alternative debt funding are individual. Among other things, companies can use it to:
- create a cash buffer to postpone the next equity round to a more convenient time
The goal is to service the capital needs at an ideal time for the company. This precision – possible on a monthly or even daily basis – avoids overfunding, which impacts the cost of capital and capital efficiency.
Why founders choose alternative debt
- Fast access to capital
- Custom funding based on real business data
- Maintain full ownership and control
Revenue-based and recurring revenue financing (RBF & RRF)
Recurring revenue financing (RRF) and revenue-based financing (RBF) are instruments related to alternative debt funding.
These instruments have been popular in the USA and Great Britain as alternatives to conventional financing for quite some time.
However, more and more early-stage companies from the software and SaaS environment are also using this type of financing in Europe.
Revenue-based financing
- Repay a fixed % of monthly revenue
- Payments scale with performance
- Total repayment capped (e.g. 1.5–3x investment)
Recurring revenue financing
- Based on ARR or MRR multiples
- Fixed repayment terms and interest rate
- More predictable cash flow impact
In both alternatives, the investors assess the company in advance. They review its financial performance. They analyze metrics and deduce how the business might develop in the future. Based on this, investors decide the funding amount and the interest rate.
These instruments are ideal for early-growth tech companies that have strong revenue engines but want to avoid traditional loan structures.
Traditional vs. Alternative Financing: What’s the difference?
Corporate finance used to follow a familiar playbook: loans from banks, equity from VCs, or government-backed subsidies.
These traditional financing models still work, but they’re not always the best fit for today’s fast-moving, asset-light businesses.
Enter alternative financing: a new wave of capital solutions powered by fintechs and digital platforms.
These providers use technology and data to rethink underwriting, speed, and flexibility.
Why alternative financing works for startups (and beyond)
Startups often struggle to access traditional financing. Why?
- They lack tangible assets like property or equipment
- Profitability may still be years away
- Their business models don’t fit legacy bank criteria
Alternative finance providers solve this by using data-driven underwriting. Instead of looking at balance sheet history, they analyze metrics like:
- Monthly recurring revenue (MRR)
- Customer churn and retention
- Cash flow trends
- Unit economics
This lets them assess early-stage businesses on their future potential, not just their current financials. As a result, alternative capital has become a lifeline for tech companies building toward scale.
But it’s not just for startups. SMEs and mid-market companies also benefit from fintech lending models.
Complement, not compete: how to combine alternative and traditional capital
Alternative financing isn’t here to replace banks or VCs. It’s here to complement them.
The best capital stack blends classic and modern funding tools. They can matched to the use case:
Why a blended approach works
- Diversifies risk
- Optimizes cost of capital
- Aligns funding with use case
- Preserves flexibility and control
Today, companies of every size have more financing options than ever. The key is matching the right capital to the right purpose at the right time.
Whether you're bootstrapping, scaling, or preparing for an exit, combining traditional and alternative finance gives you more levers to grow on your terms.
Summary: Alternative financing
Alternative financing offers non-traditional methods for companies to raise capital beyond conventional bank loans or equity investments.
Options like factoring, convertible loans, venture debt, and crowdfunding provide flexibility, allowing businesses to access funding quickly and efficiently.
These methods are particularly valuable for startups and small businesses that might not qualify for traditional financing, as well as companies seeking to diversify their capital structure.
Each form of alternative financing has its own benefits, such as improved liquidity, quicker access to funds, and tailored repayment terms.
The rise of fintechs has further revolutionized alternative finance by using technology and data to assess risk and match financing solutions with company needs.
While these options don’t replace traditional financing, they complement it. By combining both approaches, businesses can secure the capital they need while retaining control and avoiding overfunding.
Q&A: Alternative financing
What is alternative finance?
Alternative financing refers to funding sources outside of traditional bank loans, such as peer-to-peer lending, crowdfunding, and venture debt, often used by startups or businesses with limited access to conventional financial institutions.
What is the most popular form of alternative financing?
Crowdfunding is one of the most popular forms of alternative financing, allowing businesses to raise funds from a large number of individuals, typically via online platforms.
How is alternative financing different from traditional financing?
Alternative financing is more flexible and accessible, often with fewer requirements and quicker approval processes than traditional financing, which usually involves banks or financial institutions with stricter criteria.
How do alternative loans work?
Alternative loans are typically offered by non-bank lenders and can be secured or unsecured. The loan terms are generally more flexible, with faster approval and repayment options, but often come with higher interest rates.
Secure your next funding – without giving up equity
Get up to €5M in non-dilutive funding with re:cap. Calculate your funding terms and see how much growth capital you could get.
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