ExecutiveChronicles | Unconventional Ways to Fund Your Small Business: A guide to Alternative Financing | You’ve got big plans for your business. Perhaps you need to expand your inventory, jump on top of a new trend, or upgrade your equipment or accounting software. Or maybe you want to take advantage of a serendipitous opportunity. These are all fantastic goals for sure—but what if you possess more industry know-how and drive than capital? What can you do to get more funds?
The traditional bank loan application and approval process can be lengthy. And banks and credit unions can be reluctant to lend to small businesses, startups, or those with a less-than-stellar credit history. The good news? There are alternative small-business financing options available that can help you obtain the funds you need.
What is alternative financing?
Alternative financing works outside of traditional financial institutions such as banks. These lending solutions often feature flexible qualification requirements and fast approvals so that you can quickly obtain money to invest back into your business.
Types of alternative small business financing options
Invoice factoring, also called accounts receivable factoring, can increase your cash flow by enabling you to sell your outstanding invoices to a factoring company. Here’s how it works:
- Your business provides goods and services.
- You invoice your customers.
- A factoring company purchases those invoices, immediately paying you most of what your customers owe, typically between 80-90%.
- The factoring company collects customer payments.
- Once the invoice is paid in full, the factoring company will pay you the remaining balance minus a fee.
Unlike a traditional loan, invoice factoring requires no collateral, and getting approved is usually easier. Plus, you can use small business accounting software to record factoring transactions and fees so you always know where your money is coming and going. If outstanding invoices are curbing your cash flow, invoice factoring may be a good small business financing option to consider.
Peer-to-peer (P2P) lending, also called social lending, allows business owners to obtain loans directly from other individuals. This method employs financial technology, typically an online platform, to connect borrowers to investors, eliminating the need to use conventional financial institutions like banks. If peer-to-peer lending piques your interest, here are steps that will help get the ball rolling:
1. Research and apply. Decide which peer-to-peer lending platform you’d like to use and submit an online application. You’ll need to provide some business and financial details, such as income documentation and debt. Not sure if you’ll qualify? Many P2P lenders have helpful pre-qualification tools to check eligibility.
2. Review offers. Once your application is approved, potential investors can review your request and present loan offers. To find the best option, you’ll want to compare interest rates, fees, repayment terms, and loan disbursement speed.
3. Receive funds. After you accept a loan offer, proceeds will be distributed to your business bank account. In most cases, you can use the funds for any business purpose.
Harness the power of social media to spread the word about your business venture and raise funds with crowdfunding. Kickstarter and Indiegogo are a couple of examples of crowdfunding platforms that make it easy for you to reach a diverse audience of individuals who may be interested in financially supporting your project with a contribution. All contributions are pooled together to help you reach your goal.
For businesses, there are two primary crowdfunding models, rewards-based and equity-based.
Rewards-based crowdfunding. In the rewards-based crowdfunding model, you can give investors incentives to get involved. For example, crowdfunding is often done prior to a new product launch to assist with manufacturing costs. You can offer a discount on the product once it reaches the market. Rewards are typically tiered based on the investment amount.
Equity crowdfunding. If you’re open to sharing equity ownership, you can pursue equity crowdfunding. In exchange for funds, investors are offered shares of your business proportional to their investment. There are some federal and state filing requirements involved with equity crowdfunding, and transactions must take place via a U.S. Securities and Exchange Commission-registered broker or funding portal.
Benefits of alternative financing
The benefits of alternative financing differ by type, but in general, the advantages include the following:
Fast funding. Quick access to capital is one of the most significant advantages alternative financing has over traditional bank loans, which take much more time to process. If you have a short-term project or need funds yesterday, alternative financing can accelerate your cash acquisition so you can put your plans into action sooner.
Easier qualification requirements. From an established credit history to a minimum annual revenue, traditional lenders typically have a long list of stringent requirements that can make it difficult for some small businesses and startups to qualify for financing.
Could your small business benefit from alternative financing?
Alternative financing may be a smart working capital solution for your small business if…
- You need immediate capital
- You do not meet the qualifications for a conventional loan
- You haven’t been in business long
- You have imperfect credit
What to Consider
Alternative financing is growing in popularity globally and is an innovative solution for many small businesses. However, there are some things to keep in mind:
You may pay more. Alternative lenders typically have higher interest rates and fees than traditional banks.
May not boost credit. Some loan options, such as invoice factoring, may not help you build your credit.
Need to stay on track. In the case of crowdfunding, you’ll need to deliver the promised product within the specified timeline.
Fluctuating industry. The world of fintech and alternative lending is relatively new. Customer service may be limited, regulations and policies may change, and lenders may go out of business. Do your due diligence with any financing partner before moving forward.
Unconventional financing can unlock opportunities
Ready to take your business to the next level? Explore alternative financing as a way to unlock a wealth of opportunities and overcome traditional financing challenges. Whether you’re a small business or a startup, these convenient and viable options can help increase your access to capital and support you on your journey to success and growth.