If you’re planning to start a small business or operating one already, you need financial resources to keep it running smoothly and grow. You might need the financial resources to increase sales or pay for expenses to keep the business afloat. Sometimes it’s just not a good period, and you need funds to pay for production costs, utilities, payroll, etc.
When you don’t have the funds, you might visit a bank to try and secure a loan. However, for banks to approve your loan, you’ll need to meet certain qualifications, such as a 700 credit score, at least $200,000 annual revenue, minimum number of years in business, and some collateral. When you fail to meet one or all of these requirements, you can expect your loan application to be declined, which for a traditional bank happens more than 70% of the time.
And, on the slim chance that you do get approved, traditional banks dole out an average of $350,000. If you don’t need that much – say you only need $5,000 or below $75,000 – what are you to do? So, not everyone will get or want to get the capital they need from a bank. Fortunately, small businesses can get funding from other sources too. In this article, we’ll talk about alternative business financing as an option when you don’t have access to traditional bank loans.
Definition of alternative business financing
Alternative business financing is acquiring capital, loan, advance, or otherwise getting funds without going through a traditional bank. This is a quick and easy type of financing that is available for small business owners even if they have a low credit score or have no collateral to speak of, though alternative business financing can offer secured business loans too. In other words, they don’t have the same strict requirements that traditional banks have in place.
Alternative business financing is more flexible and approves loans faster than traditional banking institutions. These private financing companies have a different set of qualifications, term options, and processes for how they determine your eligibility and approval of your loan, advance, etc.
However, this quick, easy, and flexible financing option comes at a cost: higher interest rates. Alternative business financing typically applies interest rates that are higher than other business loans. In addition, it has short repayment terms, and this, coupled with the higher interest rates, results in higher payments.
Aside from capital or funds, some alternative business financiers offer capital in exchange for equity in the business, while others simply provide a platform where a small business can raise funds. It includes online loans, crowdfunding, invoice factoring, equipment financing, and many more.
How alternative business financing works
You need to submit an application and meet their eligibility requirements. While unlike traditional banks, alternative business financing might have flexible qualifications, which vary depending on the lender and financing type, you might still be required to meet a minimum credit score and/or minimum time in business.
In addition, you must also be able to prove or demonstrate that you can repay the loan, advance, etc. within the repayment terms they specify. You should have a repayment plan in place, especially since the repayment terms for alternative business financing are usually shorter than those of a traditional bank loan, such as daily or weekly.
Once your loan is approved, you’ll receive the funds as a lump sum or an as-needed basis. Approval can happen within minutes or on the same day. Note that additional fees, such as prepayment penalties or origination fees, may apply.
Alternative business financing options
There are many types of alternative business financing options that you can avail of. Some of these include the following:
- Term loans or short-term loans – A financing option that can amount to as much as $500,000 or more, without extensive paperwork or lengthy approval. You’ll get the lump sum deposited into your business bank account immediately. These loans may come with annual percentage rates (APRs) that start at around 9% and repayment terms ranging from three months to 10 years.
- Microloan or microfinancing – A small loan, amounting from $2,000 to $250,000, which requires little or no collateral but can only be used for operational expenses or for supplies, equipment, and furniture.
- Lines of credit – A financing setup that features an approved credit amount that you can continuously and repeatedly access. The pre-approved credit amount can be as little as $1,000 to more than $250,000. You can withdraw a set amount any time and then pay your withdrawal regularly. Interest rates on your outstanding balance can range from 4% to 60%.
- Convertible debt – If you’re okay with ceding some control over your business, you can have an investor or investor group shell out money in exchange for a collective agreement. The agreement states you’ll pay them a set rate of return annually until a set date; otherwise, they have the option to convert the debt to equity.
- Asset-based loan – This loan requires collateral in the form of equipment, inventory, real estate or other assets. Your loan will typically have lower rates as it is fully or partially secured with business assets.
- Merchant cash advance (MCA) – Recommended only as a last resort, a merchant cash advance allows you to borrow a lump-sum amount in exchange for a portion of future credit and debit card sales. As it will take a cut in your credit card sales, your business must accept credit card payments to avail of this loan. You’ll pay daily or weekly, so it’s a good option for retail businesses with huge sales.
- Equipment financing – When your business needs to acquire some necessary equipment, you can apply for equipment financing if you can’t pay for the entire amount upfront. This is a loan to finance the equipment, which will also serve as the collateral, so you can pay for it over time.
- Invoice factoring or invoice financing – When your business has a lot of accounts receivable, you can use it to receive up to 70% to 90% of their value. That is, get money for your accounts receivables now and pay for the loan once your customers pay you.