Alternative Financing For Small Business

Small businesses often have to get creative to secure proper financing, and that’s where alternatives to business loans come in. In June 2021, a mere 13.6% of small business loan applications were accepted by big banks. It’s easy to see why many small business owners have become frustrated with traditional bank loans.

As a small business owner, loans guaranteed by the Small Business Administration (SBA) may be your first thought. These traditional loans tend to feature great terms, low interest, and high funding limits, but these SBA loans can be quite difficult to get approved for.

Even applying for one requires undergoing a lengthy application process that leaves you with few options in the interim (nor do you have certainty that you’ll be approved for funding).

Fortunately, SBA loans aren’t your only option. Alternative financing options are available for small business ownersinterested in a non-traditional approach.

Why You Should Consider Alternative Business Lending

There are plenty of reasons why a small business may seek out alternative business funding. Maybe a poor credit score has made it difficult to secure a small business loan from a traditional lender. Or maybe the business owner simply needs a quick cash infusion that can’t be gained from an extensive loan process.

Types of Alternative Funding For Small Businesses

Whatever the reason, there are plenty of alternative business lending options out there for those who know how to find them:

• Microfinance loans
• Business cash advances
• Business lines of credit
• Private/P2P lending
• Invoice factoring
• Working capital loans

Different options have different advantages, so let’s review a few that every small business owner should know about.

1. Microfinancing

Similar to a traditional bank loan, microfinancing offers funding to small businesses in need, only on a smaller scale. So-called “microloans” usually range from $5,000 to $50,000, often featuring a faster approval process and a flexible repayment term, ideal for small businesses and startups. (In 2020, 30% of all SBA-issued microloans went to startups.)

It’s an easy way to secure fast funding when compared with traditional banking, but it has a few drawbacks. Microloans are smaller and not ideal for big-ticket purchases or large-scale business transformations.

They’re also subject to many of the same qualifications as larger loans, so businesses with poor credit, fluctuating revenue, or lacking collateral may still struggle to get what they need.

2. Merchant Cash Advances

This alternative business financing strategy allows business owners to sell the purchase of future receivables to business financing organizations like Credibly. In essence, the business agrees to sell percentages of future sales in exchange for a cash advance.

This is an effective alternative business financing option due to the way you can make flexible remittances. Since financiers generate proceeds from the business’s sales, financiers tend to base approval on the strength of the business rather than your personal credit score. This makes MCAs a great alternative to business loans.

3. Business Line of Credit

A common alternative business lending strategy is leveraging specific lines of credit for business use. Business lines of credit tend to have high limits and lower interest rates compared to business credit cards, making them favorable choices for businesses that need flexibility in their budget for investing in growth initiatives, small business marketing, and so on.

Naturally, with such favorable terms, business lines of credit can be difficult to acquire. Your lender will discuss options with you, including putting down assets as collateral, to find credit options that meet your needs.

4. Peer-to-Peer (P2P) Lending

P2P lending is performed through online platforms/marketplaces, connecting small business owners with investors who have the capital to spare.

As an alternative financing option, P2P lending lets borrowers avoid the hassle of dealing with banks and supports flexibility in borrowing arrangements. With no regulated financial institution involved, borrowers and lenders are free to set their own terms.

While this can create attractive lending arrangements, borrowers may have fewer protections than when dealing with professional lenders. Keep these issues in mind as you consider P2P lending as an alternative to business loans.

5. Invoice Factoring

While technically considered an asset purchase, invoice factoring involves working with a lender to pay a percentage of outstanding invoices, giving businesses a way to maintain cash flowwhen vendors come up short.

Other options under this umbrella include invoice financing, where business owners can receive funding through unpaid invoices, or invoice discounting, where the business receives part of the invoice, with the full total (including interest) repaid later.

Each of these options offers a viable way to manage unpaid invoices, so if delinquent customers are a concern, this can be a great alternative tosmall business loans.

6. Working Capital Loans

Finding alternative financing for yoursmall business doesn’t mean avoiding loans altogether. Working capital loans are a non-traditional way to acquire fast financing, These loans are used to cover day-to-day and operational expenses.

In terms of alternative funding for small businesses, working capital loans can add much-needed flexibility during low cash flow periods. Businesses with seasonal products, for example, may benefit from a working capital loan during the off-season.

However, bear in mind you’ll have to make fixed daily or weekly installments with these, so you need to be confident that your business can keep up with payments.

Top Tips For Finding Non-Traditional Funding Sources That Fit Your Needs

Now that you know what the top six non-traditional financing sources are, you’ve got to find one that fits your business model and your needs. Here are a few things you should consider:

Know All The Possible Alternative Financing Options You Have

You’ve been looking for financing options to fund your next big step, and you know you need something more than that traditional bank loans can offer. Alternative financing may be the right choice for you.

Look around to find options that suit your needs. In addition to the financing types we talked about above, there are things like equipment financing (make your investment pay for itself).

A key takeaway is to take your time to do your research before you commit. Find a lender or financial institution who takes the time to walk you through the options that fit your business needs and goals.

If You Have Collateral to Pledge

The great thing about non-traditional business loans and financing is that collateral is not a must-have. Options such as merchant cash advances, and even working capital loans, can require collateral. However, collateral can:

• Unlock additional financing options (such as longer-term expansion loans)
• Lower interest rates and improve repayment terms

Collateral can be any number of things, including assets such as large business equipment, commercial vehicles, and premises that you might own.

Your Cashflow Cycle: Seasonal v Sustained

Traditional loans tend to require a fixed weekly or monthly payment which can prove unfeasible for small businesses that have fluctuating revenues.

Assess how and how much revenue your business generates throughout the year. If your sales are reasonably consistent month after month and you feel confident revenues will stay stable, small business loans should be sustainable for you.

On the other hand, if your revenues are seasonal, or if you experience fluctuations in sales, a more flexible financing option may be appropriate. One possible alternative financing option is merchant cash advance, which allows you to pay depending on your monthly credit card sales.

Your Personal Credit History

Your personal credit history is one of the most important things to consider before getting alternative financing. This is because your credit scorecan play a big role in determining the interest rate you will be charged on your loan.

If you have a high credit score, you may be able to take advantage of lower interest rates and more favorable financing terms.

However, a low or bad credit score doesn’t mean you can’t get financing. There are plenty of non-traditional funding sources available for small businesses with a bad credit score. At Credibly, we look at more than just your credit score to determine your eligibility for financing.

Are You Comfortable Giving Up Control Over Your Business?

This isn’t a concern if you’re borrowing from a lender like Credibly, but it is aconcern if you’re considering getting loans from friends and family, angel investors, or VCs. If you go with either of those options, you’re likely going to have to give up some control over your business.

Most likely, that’ll be in the form of offering shares to venture capitalists and giving them some say in the business’s affairs. One survey found small business owners only retained about 45% of their company after a Series A round of venture capital funding.

Consider things such as:

• Do you and the new would-be investors align on your business ideas?
• Would it slow down decision-making unduly?
• Who will have final say on decisions?
• Do you have access to experienced legal counsel?

Individual investor relationships can be rosy when things are going according to the business plan, but when you hit a rough patch, things get rocky.

How Much Funding Do You Need and How Often?

The bigger the lump sum you borrow, the greater the interest you’ll have to pay. You need to find the available non-traditional business loans and financing that match how much capital you need. 

For example, if you need to make a one-time equipment purchase, an equipment financing loan might be ideal. It’ll provide you with exactly the capital you need, and the equipment you get will serve as collateral for the loan—a win-win.

On the other hand, if you need a small amount of funds from time to time, something like a business line of credit may be best. It will allow you to draw as much as you need, and you’ll only pay interest on that amount. Once you’ve repaid the amount, you can make a withdrawal again, without having to go through approval again.

Working With the Right Unconventional Financing Source

Finding the right partner for alternative business financing is about the most important decision you have to make. Seamless approvals are great, but you want to make sure you are working with a reputable and trustworthy company. You also want to make sure that the lender has experience working with businesses like yours.

Check for things like their:

• Track record lending to businesses in your industry
• Reviews on platforms like Trustpilot (don’t forget to check if they’re verified)
• Find out about success stories with other business owners
• How they handle disputes

Why More and More Small Businesses Are Turning to Alternative Funding Sources

Getting a loan from a bank can be difficult, especially for small businesses. Banks are risk-averse institutions that prioritize lending to businesses that they think will be able to repay the loan, with interest. This means that they are more likely to lend money to larger businesses that have been in operation for a longer period of time.

Some problems you may face when you approach a bank for a business loan, even a small one:

• Not being able to show enough collateral to secure a loan.
• You haven’t been in business for very long, so the bank views you as a high-risk investment.
• You may not have a proven history of running businesses.
• You don’t have a good personal credit score.
• The bank doesn’t understand your business model.
• Your revenues are seasonal and banks are wary of the dips.
• Maybe you have a high level of pre-existing debt.
• Maybe you aren’t good golfing buddies with someone at the bank.

It’s why business owners turn to alternative funding sources and lenders such as Credibly. We actually understand your market at the grassroots level and are able to make a more holistic assessment of your business.

ConsiderAlternative Lenders For Small Business Success

There is no single best alternative to business loans. There are many options available, each with its own benefits and requirements. The question isn’t whether to consider alternative funding for yoursmall business, it’s knowing what options are available and how to vet potential lenders before buying in. That’s where we come in.

At Credibly, we have years of experience helping businesses like yours unleash their true potential. Unlike traditional banks, our financing experts work with you to help you understand your options and customize an offering to your needs. Get funding fast so you can start growing today.