The scope of business financing is changing day by day, with many more and more funding options becoming available to business owners. From owner investments to non-bank sources, most businesses seek financing from a variety of sources. A small business, however, is always forced to face challenges when applying for a bank loan, as it may not have the perquisites to qualify for the loan. With these challenges in financing, there has been a growing trend towards “Alternative Funding” as a source for business finance or credit.
Why do Businesses Need Financing
Businesses need financing for many purposes. There are plenty of reasons why they would require a short-term or long-term lending.
They may need short-term financing to meet their working capital requirements. This may include paying salaries and wages, buying supplies, making utility bill payments and more.
A business also requires funds for their long-term needs, which is known as long-term financing. As the name suggests, this loan is generally a more substantial amount which is used for capital expenditure or to finance their long-term goals. Long-term goals may include investing in plant and machinery, buying assets, or generally using the funds in the business for return expected in the long run. A company must know which of their financing is immediate and which one can be delayed.
Why Choose Alternative Funding
Many times a business runs out of funds to meet their immediate expenses. Most of the small companies do not have an established line of credit to fund their expenditure. As such, the Alternative Funding options help to fill this void by giving business owners the financing more quickly than a bank. This is especially true for a new business that might not appeal to a bank on paper. Other reasons why the bank may not finance businesses may be:
- The company have been in business for less than two years
- Their credit score is below 640
- The business needs funding of $250,000 or more
The above-mentioned points are only some of the reasons. Most traditional banks decline up to 80% of small business loans and financing as they feel the business is not lucrative enough to pay them back. This is where Alternative Funding comes in.
Since the Alternative Funding institutes do not follow the traditional methods of picking and choosing who to lend to, they can finance those who have been rejected by the bank. So whether a business needs to launch a new product, spend on marketing, purchase equipment or expand their business, Alternative Funding is always there to help.
Less Stringent Qualifications
As mentioned already, seeking Alternative Funding is much easier than getting a loan from a bank. The business still has to prove, however, that they will be able to repay the amount they are borrowing. The qualifications of Alternative Funding are simpler, and there is less paperwork involved as compared to traditional banks.
Most banks prefer to lend if the amount is more than $200,000 because they do not consider a small amount to be worth their time and money. This means a small business may be out of luck if they need a smaller amount. According to National Business Capital, most of the urgent financial requirements are for short-term purposes, where the business line of credit is the best option.
Alternative funding allows the borrower to make payments based on the total amount that they have borrowed. This makes it easier for small businesses to make ends meet when unexpected expenses pop out of nowhere.
There are not just basic loan options available in a lump sum, but many other lending options a business can use when they choose Alternative Funding.
Low Rates of Interest
Once again, the bureaucratic nature of banks means there is not much flexibility when it comes to the rates of interest they are offering. On the other hand, the market for Alternative Funding is quite competitive meaning it drives down the interest rate for borrowers.
Also, since there is a better relationship between the lender and the borrower in Alternative Funding institutes, because they have a more comprehensive profile of the borrower, it helps to manage risks better. This way, the Alternative Funding companies may be able to offer the borrower better rates and terms.
Faster Approval Process
Credit Unions and banks are known for their lengthy approval process. There are many people along the hierarchy who are required to review every application, which may end up taking weeks or even months. In the end, there is no guarantee that the loan would be approved or not. This is a deal-breaker when you are in urgent need of funds. Alternative lenders, on the other hand, can sometimes approve loan applications within a few hours, or in a maximum of 24 hours. This is especially true for online Alternative Funding companies. Others may take more time, but businesses still get their loan within a week.
Use Funds as They Want
Most of the small business loans are to be used for specific purposes for which they are borrowed. For example, if a loan is given to purchase a bulldozer, then the business must buy a bulldozer. On the other hand, the Alternative Funding companies have no such requirements and the business can use the funds borrowed for whichever purpose they see fit.
Common Types of Alternative Funding
There are many different types of Alternative Funding available to businesses, the common ones are mentioned below.
This is the best solution when a business needs a minimal amount. These are short-term loans and typically not more than $25,000 and are spread out over five years.
In recent years, crowd-funding has been a popular form of Alternative Financing. There are two primary types, standard crowd-funding or equity crowd-funding. While the former does not require anything in return, the latter means you waive your equity in return for the funding.
Merchant Cash Advance
These are ideal for businesses having cash flow problems. This is a form of lending that is based on future credit card sales and transactions. The lender purchases the future credit card receipts, which are in turn used as collateral for the loan that the business is borrowing.
There are many reasons why a business would go for Alternative Funding. The main reason is easy and quick access to funds with the least requirements. Many times, business owners who have a thriving business may do not want to deal with banks. On the contrary, they may have a better relationship with Alternative Funding companies. Alternative lenders generally provide more personalized services to the borrowers and often guide them and advice them on which source of funding they should go for and which one they should avoid. Other times, they may simply be able to offer them better rates and terms due to their long-standing relationship. As such, when the business owners are getting all of their needs fulfilled in the best possible way, they may not require visiting a bank at all.