What is Alternative Business Funding for Small Businesses?

Just over a decade ago, we reached a recession and a financial crisis that took the Western world by storm. Affecting the US, the UK, and much of Europe, money was hard to come by and the banks lost their faith in small businesses. Suddenly, individuals and families with a dream of making a business work were left on their own.

Although many years have passed since this crisis, it’s fair to say that small businesses still have difficulty with the banks. This, along with the rise of online financial services, has led to alternative small business funding.

What’s Alternative Small Business Funding?

With the banks still hesitant to lend money to small businesses, many are choosing an alternative source of the same money. As soon as banks stopped lending, different types of investors stepped forward. Of course, these sources are quite different to a standard bank loan, and this is important to remember. However, it still provides small businesses (or any business, for that matter!) an opportunity to get the funds they need to grow in their respective markets.

Differences with Alternative Business Funding

Before we look at examples and sources you may research in the hunt for finance, how do they differ from a traditional bank loan?

• Interest rates are typically higher
• The qualification criteria will be lower (it doesn’t require perfect credit to access)
• Some sources will have the money delivered within 24-48 hours

As you can see, these three areas are quite different compared to a traditional bank loan. While the higher interest rates with alternative business funding is frustrating, it’s accessible for those without perfect credit and some are able to receive the money the next business day. Of course, bank loans are known for their strict criteria since the financial collapse as well as taking weeks and even months just to send the loan.

Types of Alternative Small Business Funding

Now you know how it all works and what alternative business funding actually means, it’s time to look at examples. Perhaps you can utilize one of these sources for your own small business when a bank loan isn’t an option? In fact, some businesses are even choosing these suggestions over bank loans. As long as you assess the pros and cons of both before making the right decision for your business, you’ll be in good hands.

Merchant Cash Advance

On the face of it, a merchant cash advance (MCA) is exactly what the name describes. You receive a cash advance which you then pay back over time. Of course, it comes with a fee and this is a set percentage of daily sales. Approved within 48 hours, it’s an opportunity for a business to receive a good amount of money before then paying back within around 18 months.

Unfortunately, this is one of the most expensive forms of alternative funding and some pay up to 40% in interest. Since payments are based on sales, they will rise and fall over time, but it’s still an expensive option.

SBA Loan

Wait…these are offered by banks. Should they really be on this list? We wanted to include them because they’re still an alternative source of finance for those who don’t qualify for a traditional loan. If we look at the 7(a) loan as an example, this is a working capital loan and is partially guaranteed by the government. With this in mind, lenders have some of the risk removed and will lend to those who otherwise wouldn’t qualify.

Equipment Financing

Often, equipment is one of the most expensive purchases for small businesses. Rather than taking a huge risk and spending thousands, there could be an opportunity to either buy the equipment on finance or lease it.

• Financing - With this option, it’s essentially a loan since you pay monthly rather than paying the whole fee upfront. If you fall behind, the equipment will be taken back. If not, you’ll own the equipment once the contract is up and all payments are made.

• Leasing - By leasing, you’ll never own the equipment, but you only pay monthly for its use.

Business Lines of Credit

These days, lines of credit are simpler sources of finance and we recommend every business having one (even if they don’t need money right now). Here, a lender allows an amount of credit and you draw whatever is required. From here, simply pay back the amount you’ve used - just like a credit card, but with cash.

Other Sources

We could continue all day with options for alternative small business funding, so we’ll finish with some more quick-fire ideas;

• Term Loan - Although a typical loan, we’re talking about those that come through online lenders. With monthly payments, they’re completed in anything from two to five years.

• Invoice Financing - If your customers often pay late and this affects cash flow, lenders will pay your invoices in advance. As soon as the customer pays, the lender is paid back. You’ll lose a small amount in fees, but it helps to keep cash flow positive.

• Peer-to-Peer Lending - Along with crowdfunding, P2P lending is another useful source of finance these days. After receiving money from other people online, you either pay interest on the repayments or give away a small equity stake in your company.

There are plenty of alternative business funding options, so do your research and choose the one that suits your business today. You could even consider niche-specific loans, such as;

• Cannabis, Hemp, and CBD Business Loans
• Residential Investment Business Loans
• Commercial Real Estate Investment Loans

You can talk to an expert in alternative funding for small businesses by contacting Drew Cashmere at South Florida Funding Group.  Call today! 786-544-2700