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What is Alternative Financing?

If you’ve ever wondered whether you must use a bank for your financing, you’re not alone. It’s a common question that comes up for many, whether starting a small business or just curious if there are alternative methods of processing their finances that don’t involve a bank. Banks don’t often make it easy to obtain loans, so wondering if there are other channels is a good place to start.

Alternative financing is the process of using channels for finance outside of the traditional banking market. It is a type of business structure that does not use a mainstream banking provider for loans and other general banking structures.

Financial crises throughout the last 15 years have seen companies, small businesses, and everyday people struggling to get efficient loans from banks and as such have had to turn to other methods. Read on below to find out everything you need to know about alternative finance, how this financial structure can help you, and how it differs from traditional banking.

What is Alternative Finance?

Alternative finance is a much broader term used for numerous sources that can be used by a person, or business, to gain financial means without using a traditional bank.

Once upon a time, someone came up with the idea to create a system where they could safely hold someone’s money, and in turn, earn money from that by lending out this money and asking for it back with interest. Today this is what we know as a banking institution.

Banks have grown so large that without having your name registered to one, you can’t get paid, nor can you rent a house among other circumstances. But a common misjudgment is that if you can’t get a loan from a bank, you can’t get a loan at all. Enter alternative finance. Where this has become possible it might just be more accessible than using a bank.

Why Do You Need Alternative Financing?

You might need alternative financing if you need a loan that the bank won’t offer you. When starting a new business, cash isn’t exactly growing on trees, and seeking funding can be difficult if the banks don’t provide what you need.

You need cash to grow your business, but the bank generally wants you to pay them back with interest and they want proof that you’re going to pay them sooner rather than later. This doesn’t make it easy for you as a small business owner and it can be a very stressful time too.

You need alternative funding because alternative funding options can give you the needed funds to start, run, and grow your business.

Here is what alternative finance funding groups can do for you and your small business:

  • Merchant Cash Advance (MCA) Funding options
  • Business loans, unsecured and secured
  • Equipment leasing
  • Credit monitoring
  • Credit repair services
  • Small Business Administration (SBA) loans

And plenty more depending on where you choose to take your businesses financing.

You can find alternative financing solutions online through many different platforms and it’s important to research each one before you choose because not all offer the same services and interest rates will differ.

What Can You Use Alternative Finance For?

When it comes to your small business you want to be able to start on the right track and stay on the right track. That’s why you can use alternative finance at the beginning of your business journey but also during your business setup.

Here are a few examples of what you might use alternative finance options for:

Purchasing new equipment

If your small business involves needing physical objects to run efficiently, you can use alternative finance to purchase new equipment.

Gym necessities, computers, laptops, work uniforms, coffee mugs, tables, and chairs, etc.

Increase the business inventory

Businesses can only work if they are selling to clients and customers.

If you’re a small retail or coffee shop you will need to keep your store well-stocked with inventory to serve and sell to customers.

Let’s say you’re a candle shop and you’ve run out of candles to sell, you’re now losing customers, profit, and reputation. Increasing the business inventory through alternative financial means can prevent this from happening.

Expanding the business

When your business is running smoothly, and things are on track you might be considering expanding the business. Instead of going through the long process of applying through a national bank that might not agree that your profitable business is profitable enough to expand, you can turn to alternative financing.

Payroll and taxes

Paying your employees is an important and essential part of running a business. Remember they have bills and debts to pay off and lives to live. If you fail to pay your employees on time and in full you can face lawsuits, a ruined reputation, and more.

Using alternative financing to pay your employees can help you to retain employees and their loyalty reduces the risks that come with having to cut costs and keeps your reputation intact.

Some alternate loans you might consider for payroll purposes are merchant cash advances, invoice financing, credit lines, term loans, and working capital loans.

What Types of Alternative Finance are There?

Unlike the bank where loans and markets are purely based on credit scores, profits, and what the bank can get out of your business, alternative funding can mean a whole range of funding options.

There are some out there who recognize that small businesses may need a helping hand and an opportunity to get their feet on the ground to be able to start running. Because of this, there are numerous available income streams for those seeking alternative funding solutions.

If you’ve already tried and had no luck or have considered that a bank won’t give you a loan, you do have alternative funding options. You might also go down this route if you have a bad credit score because some alternate finance options don’t require you to show your credit rating.

Here are some types of alternative finance activities:

Equity Crowdfunding

The first and most important thing to point out in equity crowdfunding is that there is no debt component involved in this type of financing solution and it is rarely used as a rewards-based type of fundraising element. 

Crowdfunding is generally done through an online source where the platform may or may not take a percentage of the funds raised. It is legal in the US to raise up to US$5 million a year through crowdfunding.

Where equity crowdfunding differs from traditional crowdfunding is that the capital raised online for equity crowdfunding is through investors who receive equity ownership in the business in return for the cash they provide.

The method of using equity crowdfunding gives investors the opportunity t0 become a part of your business. If you want to avoid debt (debt financing), you’re not yet a profitable startup company, and you’re interested in having a partner or two who also take some control over the business, then equity crowdfunding could be the right option for you.

Peer-to-Peer Lending

If you want to cut out the banking and financial institution altogether you can seek to obtain a loan directly from your peers. The bank is, after all, just the middleman.

Peer-to-peer lending can also be called social lending, enabling small business owners the chance to accept or pitch for a loan immediately from another individual rather than having to go through any banking or financial means.

Peer-to-peer lending is usually awarded by the lender gaining investment in the property. Some investors search and scour the internet to find these small businesses that require a loan so that they can become investors in something they believe can make them a profit.

Investors are taking a risk when they choose to delve into peer-to-peer (p2p) lending so will usually choose very carefully based on the business avenue, their future planning and projection, possible return on investment, and of course, the business pitch, values, ethics, and if we’re being honest, how much they like the owner and think they will succeed.

It’s easy enough to find p2p lenders through online platforms like LendingClub, Upstart, and Peerform.

Conventional Loans

Alternate conventional loans are available if you find the right platform. Conventional loans through alternative funding that cut out the banking institutions can be financed by lenders and investors.

Where you will find investors on one platform, you will find those willing to grant you a conventional loan but just like a bank, will expect interest in return. The difference is that it doesn’t affect your credit score.

Grants

Think of a grant as an alternative conventional loan without having to pay anything back.

Grants are used in multiple business structures including real estate, events management, non-profit sectors, and more.

For example, government grants can assist with down payments in real estate for first home buyers to reduce the amount they have to pay and to encourage people to seek loans and buy. Which in turn keeps the economy from growing weak.

Another example is in events management where to put on a community event that benefits the government event coordinators can seek approval for a grant that allows them more money to attract more attendees and visitors to the area.

Grants are granted when the granter (typically a government power) sees value in the application and believes in the benefit for the economy.

Financial Technologies (Fintech)

Fintech is the progress in financial services by technology improvements. It is the integration of finance and technology and is used by businesses to enhance their financial services and situation.

The expansion of technology and finance to create fintech services includes the incorporation of innovations such as cryptocurrencies and digital finances and wallets.

Fintech companies allow users to make transactions on behalf of their business through a whole range of digital providers like blockchain technology, smart contracts, insurtech, cybersecurity, and more.

Fintech also includes online platforms that alternative financing provides too like peer-to-peer lending, crowdfunding, etc.

Angel Investment

Angel investors are private investors who take on large risks by privately investing in the equity of a startup business in its early stages in hopes to make a valuable profit.

Angel investors will earn their take of the profits based on how much of the company they own. They are typically already wealthy individuals who seek out startup businesses needing additional funding to get the business running efficiently.

If an angel investor takes an interest in your business, they will seek to purchase a percentage of the business and earn from the profit the business makes but will choose whether they want to take any control of the business.

Because angel investors are already wealthy individuals they may have connections and contacts that can help your business with exposure and brand awareness.

Bootstrapping

Bootstrapping is a term closely related to entrepreneurs who start a business with little capital and rely on the money off their own back as well as to grow quickly and efficiently without the need for external involvement.

“Boostrappers” will use only what they have in existing equipment and resources, like personal connections, contacts, education, social media marketing, tech skills, and personal savings to start and run a business.

For example, a photographer who wants to start a business to sell their photographs can start a business off their own back by setting up a website, a social media account, and signing up to multiple online platforms to extend their photography brand awareness.

Pitch Competitions

No, it’s not like a Pitch Perfect competition. Although it is a similar concept where entrepreneurs approach a panel with their business idea in hopes of winning cash prizes and capital gains to start the business.

The competitions are generally set up to only allow contestants limited time to present their idea and those with the best idea or with the idea with the most promise will succeed in selling their idea to the judges.

One of the many benefits of a pitch competition is that the money is won fair and square, it is a gift rather than an equity investment, and even if the idea doesn’t win it does allow for an idea to be exposed and spread for some critical feedback related to the startup concept.

How Does Alternative Financing Work?

Although you might consider this as a faster way to get cash when needed, this fast cash does come with the same concept as any banking institution.

When you’re ready to apply for alternative financing, whichever company you choose to go with will have an application process.

It works the same as any other loan except there are fewer channels to go through and interest rates will not be the same as the bank.

Once the funding is approved and repayments are scheduled, the money is deposited into your account and now you’re on your way. Hence why some call it “fast cash”.

The average interest rate on a personal loan through a banking institution is around 9.41% (as of 2019) while interest rates on alternative finance can be as little as 4%. Repayment and interest rates on alternative funding solutions can also be as high as 99% so again, do your research.

Banking Vs Alternative Finance

While alternative financial solutions are available, not many know about their availability and versatility. The very first bank in the US was founded in 1791 while alternative lending options and solutions only began around 2008 after the housing market crash and recession.

The economy needed to get back on track, but banks weren’t willing to give out loans so easily anymore, hence why unconventional financial options started becoming more and more available for small business owners, starting with companies like FundKite.  

Other than the ease of applying for an alternative financial solution for your small business, there are some differences in the application and processes of banking and alternative loans.

Here are the main differences between the two:

Traditional Banking

Alternative Financial Solutions

Applications go directly through the bank

Technology enables applications (great online services)

It can take weeks, sometimes months for applications and approval to go through

Approvals can be granted within hours or days rather than weeks and months like a conventional bank

Interest rates are fairly standard across most traditional banks and banks tend to offer lower interest rates

Interest rates differ and there is no typical average of interest rate repayments

Banks take the risk

Individual investors take the risks

Conclusion

Alternative financial solutions are around to help business owners run and grow a sustainable business by giving them the capital needed to get them there.

With numerous options available through the alternative financing route, entrepreneurs and small business owners can get their idea and development started within days rather than going through a bank and it takes weeks for approval or rejection to come through.

Using alternative financing solutions is considered “modern-day borrowing” and alternative finance has grown considerably since 2008 so it’s important to do your research into the third-party company before making your application.

References

 How The Alternative Lending Industry Began (fundkite.com)

Understanding Alternative Finance Basics | FundThrough

Alternative Small Business Funding | Approval Process (southfloridafundinggroup.com)

What Is Equity Crowdfunding? How to Get It - NerdWallet

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The business funding you need when others say No!.

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DISCLAIMER

 The operator of this website is NOT a lender, does not make offers for loans, and does not broker online loans to lenders or lender partners. Customers who arrive at www.SouthFloridaFundingGroup.com are matched with a lender or a lender partner, who offer business loan products or credit repair services.