“I’m a big fan of small business ownership. I think it’s the backbone of American innovation. But to be successful, you first have to have the courage to go for it.”
– Bill Rancic, entrepreneur
What Is Alternative Business Financing?
Alternative business funding means gaining capital outside the traditional banking system. Alternative business financing denotes applying for a loan from an online lender for certain specific businesses. Such lenders can be referred to as fintech lenders, a portmanteau of “finance” and “technology.”
The objective of business for choosing alternative business loans is diversified. So, due to such instances, online financing is most preferred to obtain a bank loan when you are low with credit or have limited time in business. However, some companies go for alternative funding because they are burdened with debts or have minimum qualifications to apply for a traditional loan. Additionally, multiple other businesses prefer an alternative funding system because online lenders are faster and more convenient than financial instruments like banks.
Alternative Business Financing vs Traditional Financing
Before we move ahead with an overview of different funding options for small business Plans, compare traditional financial instruments with alternative funding options.
- Alternate financing comprises a broad category and includes numerous funding options, while the traditional business financing space is maximum and limited.
- Traditional business financing refers to term loans and lines of credit from a bank or credit union.
- The traditional banks’ approval rate for business financing is much lower than alternative lenders.
- Banks are more prone to risk than alternative lenders, as they have more stringent borrower qualifications.
- Traditional business loans have a lower interest rate and more extended repayment term options than alternative financing.
5 Best Financial Alternatives For Small Businesses
The article will deliver practical corporate finance Assignment help and the best financial alternatives for a small business plan. Thus, here are the top 5 financial options that fit well with your business requirements.
- Lines of credit
The Line of credit (LOC) financing is found from a bank or an online lender. However, with term loans, business LOCs are typically easier to take than a bank. However, if you are not aware of the term, a line of credit can provide a financial safety net of working capital for a business. Hence, with this, you can get a sum of money any time, and interest is charged on what you borrow.
Moreover, an online business line of credit acts as an excellent alternative financing choice for a business. It doesn’t require a specific amount of money for extra funding or cover expenses such as payroll.
- Online Loans
In the name of loans and lines of credit, multiple online lenders sell business financing products similar to bank term loans. However, online loans are comparatively different from bank loans in specific ways. Generally, you can get online loans with less stringent requirements like credit score, time in business, and annual revenue. Additionally, they are easier to apply and take minimum funding time. But, with a lot of convenience and accessibility, online loans come with higher interest rates than the standard bank rate.
- Term Loans
A term loan, also known as an installment loan, is a traditional business financing delivered by a bank or credit union. The term loan is repaid with a variable or fixed interest rate within a stipulated period of six months or five years. Today, you can apply for a term loan directly from a lender website via a crowdfunding platform.
Moreover, modern term loans come with user-friendly and customized features. Additionally, term loans offer the client’s in-built transparency and flexibility to reduce hassle in the payments process. Hence, you can easily qualify to get term loans if you are burdened with debt or have low credit.
- Short-Term Loans
Applying for short-term loans from an online platform is more accessible than a traditional bank or credit union. A short-term online loan has a shorter repayment term within a year or a few months. However, short-term loans are entirely different from traditional term loans in multiple ways, including:
- Factor rate fee structure instead of interest rate
- The lender cares more about your daily cash flow than your credit score
- Faster time to funding maximum one to two days
- Higher total loan cost between 10% and 60% borrowing amount
- More frequent repayments
With the availability of several short-term lenders, beware that you can find a reputable and reliable short-term lender. Thus, with a potential lender, you can obtain a large sum of cash to fund your small business in a short frame of time.
- Merchant Cash Advances
Merchant Cash Advances (MCA) are similar to short-term loans and are relatively easy with factors like rate fee structure and are in-expensive than a traditional bank loan. Technically, though, a merchant cash advance is not a loan — it is an advance on your future earnings. A set sum of money starts recouping plus interest as a lender front. So this amount will fluctuate with your daily sales. Additionally, merchant cash advances lender will deduct from your daily sales in failure to pay or until you repay them.
However, I advise you not to get merchant cash advances if you don’t qualify, as these are very expensive and potentially predatory than other short-term loans. Thus, MCAs are among the few sources of financing instruments available for struggling businesses that don’t qualify for the traditional lending process.
Getting funds to establish your small business from traditional bank instruments can be pretty challenging. Therefore, adopting an alternative can be the best option to save you from multiple rejections. However, the funding options you choose must have a backup so that you don’t struggle with future payments. With several financial alternatives listed above, I hope you have gained an overview of the small business plan’s funding options. Thus, before availing any of them, get help from top financial specialists for better results. GOOD LUCK!