The difficult part of starting up a business is not financing as most people think, but in knowing the business that you want to start. Since you have the idea and the plan, funds should never be the problem because there are alternative business funding platforms available to handle that for you. In this article, we’ll explain everything you need to know about alternative business funding, as well as some financing options to help you grow your small business
What is Alternative Business Funding?
In short, alternative funding means obtaining finance for your small business away from regular bank loans. Many of these alternative funding sources are available online, and you may want to look into them if you’ve been turned down for loans in the past, have bad credit, or are unsure how much funding you truly need for your business.
In the past, small businesses have had trouble securing bank loans, and bank lending to small enterprises hit an all-time low during the recession.
However, the good news is that, as bank lending has dropped, non-bank lenders have stepped in to fill the hole, providing more alternative funding options to small business owners than ever before.
So, if you’ve attempted and failed to get finance through a bank, you might be investigating alternative lending—and fairly so. But keep in mind that, while there are certain solutions that are similar to bank funding, many alternative business funding options do not work in the same manner.
With this in mind, let’s take a look at the most prevalent sorts of alternative funding for small businesses so you can see what’s out there and what might be the greatest fit for your business.
#1. Crowdfunding
Crowdfunding is another alternative source of finance that is often advantageous for product launches. It allows you to finance your business by accepting contributions from a wide range of individuals, investors, and businesses.
This type of funding is comparable to building a promotional landing page to measure interest; it’s a viable technique to test the market. Like business credit cards, Crowdfunding doesn’t always come from an alternative, online lender. However, because it doesn’t come from a bank or credit union either, it’s worth discussing as a form of alternative business funding.
Furthermore, crowdfunding has various advantages. It could serve as a great avenue to build other forms of funding, but if you’re considering it, keep in mind that each crowdfunding site is unique. Some only provide funding for a limited time, others require you to fulfill a specific goal in order to receive funds, and still, others function as long-term community sites. If you choose this way, make sure to read the fine print to fully realize that you may get all or nothing.
Consequently, crowdfunding can be a challenging type of financing because it takes a significant amount of time and effort to create, monitor, and successfully market your campaign. Having said that, it’s certainly worth considering for startups or businesses that can’t qualify for other types of funding.
Crowdfunding Qualification
Typically, any business can start crowdfunding, nevertheless, it’s perhaps most suited for businesses that:
- Have a wide network
- Sell a product or service
- Have a unique value proposition
- And have an active social media
#2. Term Loans
Term loans are your reliable business loans, and they’re probably what come to mind when you think of a loan. A term loan is a loan that a lender gives you for a set amount of money that you repay with interest over a set period of time.
Having said that, business term loans are perhaps the most similar to bank loans of all alternative business funding options. Unlike bank loans, alternative term loans are available from online lenders. These term loans, also known as medium-term loans, are typically repaid in two to five years with monthly payments.
Additionally, term loans are more expensive than bank or SBA loans, despite being some of the more affordable alternative business funding options. The benefits of these products include faster application and funding times, but the drawbacks are that they can be difficult to qualify for and there aren’t many lenders offering this product.
Term Loan Qualification
You could be a successful applicant for this alternative funding option if you meet the following requirements:
- 600+ credit score
- One year in business at least
- And $100,000+ annual turnover
#3. Business Credit Cards
Although most business credit cards are issued by banks (rather than online lenders), these products are a type of alternative business funding in the sense that they are not typically associated with small business loans.
Having said that, a business credit card, like a line of credit, is something that every business owner requires. A business credit card may not be able to finance your entire company, but it can help with day-to-day expenses and allow you to build business credit.
Furthermore, many business credit cards allow you to earn cashback, rewards points, or even travel miles as you spend. So, in addition to your other financing options, you’ll want to make sure you have a solid business credit card that meets your financial requirements.
Business Credit Card Requirements
For you to qualify to access a business credit card, you must have:
- A solid personal income,
- 600 and above credit score
- And a well reputable business presence
#4. Business Lines of Credit
Whether or not a small business owner requires alternative funding right now, every owner of a business should have a business line of credit. In the event of a cash flow emergency, lines of credit are an excellent option. Because quick cash can be costly, having a business line of credit in place could save you money in the long run.
Business lines of credit are similar to credit cards in that the lender extends you a certain amount of credit and you withdraw only what you require. Following that, you only pay back (with interest) what you use. However, unlike credit cards, you have access to cash.
To some extent, lines of credit used to be difficult to qualify for at a traditional bank, but alternative business funding sources have made them easier and faster for every small business owner to apply online.
Lines of credit qualification
You could be a successful applicant for this alternative funding option if you meet the following requirements:
- Your business must be at least six months or above,
- with an annual revenue of $50,000
#5. Equity Financing
The next option to discuss on the alternative business funding options for small businesses is equity financing. Equity financing, like crowdfunding, does not come from online lenders and is not a viable option for every business. Nevertheless, it could be an option to consider for certain startups or businesses with high growth potential.
In contrast to debt financing, equity financing involves raising funds by selling stock in the company. You could sell stock in your company to angel investors, venture capital firms, or even friends and family. In fact, in some cases, crowdfunding can be used to raise equity capital.
Of course, there are drawbacks to this type of alternative financing, including the fact that it is difficult to obtain for most small businesses and that you must be willing to relinquish some control over your business. However, for businesses that can find angel investors or access equity financing in some other way, this can be a very affordable and desirable option.
Equity Financing Requirements
You could be a successful applicant for this alternative funding option if you are:
- Looking for mentorship in addition to capital
- A startup with significant growth potential
- Confident in you financial estimates and able to turn a profit soon
#6. Merchant Cash Advances
Merchant cash advances (MCAs) are frequently the first product that small business owners consider when considering alternative business funding, but they should be the last. Despite being one of the first alternative business funding options for small businesses, merchant cash advances are by far the most expensive on the market.
MCAs are essentially cash advances that you repay with a percentage of your daily credit card sales. The benefits are that payments fluctuate based on your sales and that they are simple to qualify for. On the other hand, the drawbacks are that the APR on these products can reach triple digits, and with constant payments, MCAs significantly impede your cash flow.
As a result, while this type of financing may be appropriate for some businesses, you should consider all other options before committing to a merchant cash advance.
Merchant Cash Advance Requirements
You could be a successful applicant for this alternative funding option if your business meets the following requirements:
- 500 or credit score
- $50,000 or more annual turnover
- Increased debit and credit sales on daily basis
#7. Invoice Financing
Finally, you might consider invoice financing as a form of alternative funding for a startup or a small business owner. It’s a great option for businesses with slow cash flow and late-paying customers. Lenders will advance you an amount equal to 50-90 % of your outstanding invoice with invoice financing.
When your customer pays the invoice (which pays the lender), you’ll receive the remaining percentage, less any lender fees. These lenders typically charge a flat percentage for the advance, followed by a percentage per week outstanding.
Furthermore, because the invoice serves as collateral on the loan, invoice financing, like equipment financing, can be a quick and easy type of alternative financing for small business owners to qualify for.
Invoice Financing Requirements
For you to qualify as a candidate of these alternative business funding options, here is what’s required of you:
- Customers that are outstanding unpaid invoices
- $50,000 or more in annual turnover
- Six months or more in business operation
Other Alternative Funding for Small Business Owners
#1. Grants
A grant is a form of financial aid given by the federal, state, or local governments. It is a sum of money offered to an applicant who appears to have a good chance of succeeding.
They are far more competitive to receive because they are granted money rather than borrowed money.
Grants are extremely valuable, even though they are tough to obtain and generally require specific circumstances. If you’re looking for a grant, the government and SBA are the most prevalent but tough possibilities. However, resources such as NAV and the National Association for the Self-Employed might help you find more open choices to make obtaining a grant easier.
Read Also:Business Grants: Grants for Small Businesses In the UK
#2. Pitch competitions.
This is another one-of-a-kind alternative business funding option that is ideal for entrepreneurs or those working in incubators. Pitch competitions usually demand you to be from a given region, be in a certain level of revenue, or be part of a group of entrepreneurs.
This type of investment is very advantageous for people who have an established firm that wants to expand, and it’s a terrific method to get your company noticed. If you’re not a tech or medical startup, don’t lose hope. There are sometimes regional or community-driven pitch contests that occur from time to time, depending on where you live.
#3. Peer-to-peer lending
Peer-to-peer lending, also known as social lending, is a type of lending that allows individuals to borrow and lend money to one another. Consider it a hybrid of crowdfunding, loans, and angel investing.
There are various online platforms that operate as pitching services, allowing you to connect with investors for finances and insight, as well as reach out to a community of like-minded investors. This type of alternative business funding is best suited for existing businesses wishing to expand, and it usually necessitates a detailed pitch deck to be presented.
#4. Fintech
Financial technology lenders have recently emerged as viable alternative funding for small business borrowing. These lenders often offer smaller loans, more credit possibilities, reduced entrance hurdles, and operate entirely online.
Kabbage and PayPal are two significant possibilities, but the key is to do your homework. Each choice has its own set of advantages and disadvantages, which may include fewer funds accessible, a long-term commitment to a certain lender, or even higher interest rates. Fintech allows businesses to increase their financial alternatives, automate accounting, and accept online payments, among other things.
#5. Angel and Venture Capital Investment
Individuals or businesses prepared to invest in startups are known as venture capitalists or angel investors. They’re usually seeking a profit (you’ll need an exit strategy or a growth strategy) or a stake in your company.
This type of funding is best suited to specific industries (e.g., tech, medical, and online) and typically requires your company to be disruptive and ready for development. If this appears to be viable alternative funding for you, you’ll need a great business strategy and pitch deck.
Conclusion
Seeking funding for your business through traditional bank loans can be difficult at times. These alternative funding options can help you save time and rejection along the way. However, whichever funding option you choose, it is critical to have a solid business plan to back up your business and improve your chances of obtaining funds.
At the end of the day, alternative business funding is one of the most common ways for small business owners to obtain the capital they require to expand and build their operations. As previously stated, there are numerous products available on the market from a variety of lenders, so your next step is to begin your search.
Finally, keep in mind that the best loan and lender for your company will be the one with the best rates and terms. Therefore, you’ll want to compare all of your business financing options before deciding what’s best for you.
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What are the 5 sources of finance?
- Trade Credit
- Indegenious Banker
- Commercial Banks
- Installment Credit
- Advances
What are alternatives in business?
They are strategies that a business develops to determine the direction in which people and material resources will be employed to increase the likelihood of accomplishing specific objectives.
Can you get funding with just an idea?
You can, but only at the concept level. You must put your plan into action. Create a product and attract your first consumers.
