Working capital is often the secret sauce for growth, and there are several alternative financing options for small businesses to explore. Whether you’re overcoming financial hurdles or planning for expansion, you can always think of these options. From lines of credit to crowdfunding and beyond, there’s something for every business.
What Is Alternative Financing?
Alternative financing encompasses small business loans, advances, and other forms of commercial financing provided by alternative funders and financing firms. It caters to businesses unable to meet the stringent criteria of traditional banking institutions for loan approval.
These alternative financing companies offer enhanced flexibility, enabling small businesses to secure the necessary working capital. Such companies offer both unsecured and secured business loans, thereby accommodating a diverse range of financial requirements. Alternative financing serves as a vital resource for businesses seeking accessible and adaptable funding solutions beyond conventional banking channels.
Why do Businesses Approach Alternative Funders?
That are various factors that make small businesses seek working capital from private funders or financiers. Rejection by banks is a common scenario especially for small business owners, many small business owners proactively opt for private funding due to its fast application process. The primary motivation often lies in the urgency to address business needs promptly, a feat achievable through private financing compared to traditional banking routes.
Typically, working capital is required to cater to expenses like payroll, expansion costs, real estate, utilities, production expenses, and marketing endeavors. Furthermore, businesses experiencing downturns may require working capital to sustain operations during periods of sluggish sales, ensuring continuity and providing a buffer for recovery efforts.
Alternative Funding and Financing Options to Consider
1. Short Term Loans
Short term loans is the best option for businesses that require quick access to working capital. Among these, term loans emerge as a financing option offering a lump sum of working capital, accompanied by predetermined payment schedules and amounts. Upon approval, the allocated funds are swiftly disbursed into the business’s designated bank account, facilitating immediate utilization. Short-term loans, often have less stringent eligibility criteria and streamlined approval processes, ensuring faster access to funds.
2. Line of Credit
When businesses require a predetermined sum of capital accessible for withdrawal as needed, a line of credit is a suitable option. A small business line of credit permits the entity to access funds up to a predetermined credit limit, with the flexibility to draw as required, subject to regular repayments.
Different from conventional loan structures, a line of credit gives businesses continuous and repeatable access to funds, aligning with fluctuating financial needs and operational emergencies. A line of credit is a versatile financial tool, that offers businesses ongoing liquidity and agility in managing their working capital requirements.
3. Asset-Based Loan
In asset-based loans small businesses secure working capital by leveraging assets as collateral. This arrangement often translates into more favorable lending terms, including potentially lower interest rates, owing to the security provided by business assets. Assets with higher liquidity enhance the safety of the loan. This structured approach allows businesses to access necessary capital while mitigating risks for lenders.
4. Merchant Cash Advance
A merchant cash advance is a short-term financial solution wherein businesses receive immediate working capital in exchange for a percentage of their forthcoming credit/debit card receivables. However, there is a prerequisite for businesses to facilitate credit card processing as a method of client payment.
This financing option offers quick access to capital, tailored to meet urgent financial needs. However, it has a unique repayment structure, whereby future receivables are allocated toward repayment. Thus, while advantageous for businesses with consistent credit card transactions, wise consideration of the terms and implications is important before opting for a merchant cash advance. Merchant cash advance carries a high rate of interest.
5. Invoice Factoring
Invoice factoring is a financial mechanism wherein a business sells its invoices at a discounted rate to expedite access to working capital. Usually, there is a delay of 30 to 90 days in receiving customer payments, in such cases invoice factoring emerges as a good solution for small businesses grappling with cash flow constraints.
By leveraging this approach, businesses can quickly unlock funds tied up in outstanding invoices, enabling timely fulfillment of operational obligations and investment in growth initiatives.