Business

4 Alternative Ways to Fund Your Small Business

4 Alternative Ways to Fund Your Small Business

In recent years, many new and alternative ways to bank financing have emerged for small businesses looking for funding. These options allow quick and easy access to capital at the business’ time of need. However, it is worth mentioning here that obtaining financing is not an end in itself, but the consequence of rigorous financial planning and in-depth knowledge of these instruments. Deciding the amount of funds needed and which funding option to go for is a decision that requires a significant amount of time and effort.

Securing financing is essential to boost a small business and achieve its expansion; however, it is necessary to choose the right product to prevent this loan from becoming a liability whose terms the business fails to meet. The correct choice of financing for the business does not just involve considering the interest rate on a funding option – many other factors such as loan repayment terms, fee structure and the eligibility criteria set by the lender must be taken into consideration before choosing the best financing for the business.

If you are a small business owner looking for alternative small business loans, here are 4 options to consider:

1)    Crowdlending

Based on a similar concept as crowdfunding, crowdlending is a financing method whereby several investors come together to provide a loan, instead of a single financial institution. It is a relatively new financing method that works mainly through online platforms that bring together lenders and borrowers in order to provide lending solutions to businesses that are unable to secure bank loans.

Since online crowdlending platforms do not have a significant amount of overheads, they charge a much lower fee and thus, are an attractive alternative financing option. The loans provided are either unsecured or secured against the owner’s personal assets or assets of the business. Interest rates may either be decided by the lender or by the online platform.

Crowdlending is a beneficial solution for all parties involved. The lending platform earns its income through a fee charged on each loan. Investors have control over how much profit they can earn on their money, compared to putting their money in the bank and earning a meager amount of interest. And the borrowing business gets access to funding, even if it is a relatively new/small business whose loan application has been rejected by the bank.

2)    Line of credit

Under this financing method, the business is granted a specific amount of money, which it can withdraw at any time it needs to. It is very similar to a credit card. Only when you use the line of credit will you need to pay interest on the amount you have borrowed, with no interest being charged at other times. Once the existing credit is repaid, the line of credit is open for borrowing once again.

This funding option works as a great safety net in cases of cash shortfalls or working capital problems, which are very common in small businesses. Lines of credit are available from both the bank and online lenders and are fairly easy to qualify for. While this is a very convenient and flexible method of finance, it does come with a high-interest rate and significant penalty for late payment.

3)    Merchant cash advance

For small businesses with unpredictable revenues that find it difficult to keep up with fixed interest payments on conventional loans, a merchant cash advance can be a useful financing option. It is basically an advance on your future earnings – the lender provides an amount of money and requires the business to pay it back along with interest from its daily sales. A specific percentage of sales has to be paid to the lender. There is usually no repayment period – you just need to continue paying the decided percentage until the loan amount is repaid in full.

Merchant cash advances tend to be quite expensive compared to other financing options, but are still a useful alternate for new, struggling businesses that have difficulty keeping up with the usual fixed payment terms due to their unpredictable revenues.

4)    Invoice Factoring

Some small businesses have no choice but to offer attractive credit terms to their customers in order to gain a competitive advantage over their competitors. This results in a significant amount of their money getting tied up in receivables, resulting in cash flow problems – the business must pay for expenses such as rent, salaries, and bills on time, even when cash inflow is slow.

Invoice factoring is a great option for such businesses as the lending company advances 80-90% of the value of unpaid receivables immediately. When the customers pay their dues, the remaining amount is paid to the business, after deducting a factoring fee. This is usually equal to 1-5% of the receivable amount, depending on how long the customers take to pay the company. Although the factoring fee reduces the profit margins of the business, it is still a good way to gain immediate funding using your own receivables, without having to chase after customers.

Conclusion

One of the most difficult things about starting and running a small business is finding the funds to run its operations. Fortunately, businesses today have a range of alternative financing options to secure the money they need, rather than just relying on conventional bank loans.

Consider these 4 alternate funding options for your business. If used correctly, they can be highly beneficial in ensuring that your business survives and achieves all its objectives.