Many small business owners find it hard to get their venture off the ground and keep it running. In fact, statistics show that 20 percent of new businesses fail in the first year, 30 percent close their doors in the second year, and 50 percent tank after five years. Some business owners keep their companies afloat with alternative financing, and your business may benefit from it, too.
What Is Alternative Financing?
Simply put, alternative financing is funding other than a traditional bank loan. One reason why business startups seek this financing option over bank funding is because most banks will not lend money to a new business with no or little credit and collateral. The banks don’t care that you need business insurance in Wilmington or elsewhere among other startup costs. They won’t take chances on any business that cannot back the loan up and pay it off without issue.
Other financers, such lenders who work with U.S. Small Business Administration and independently, offer alternative methods for you to get your hands on the cash you need to open your doors and/or grow. The SBA, for example, has a microloan program designed to benefit small entities. You can also open a crowdfunding campaign and seek startup donations. Accounts receivables or purchase order funding puts money in your pocket, as does a merchant cash advance.
How the funding works depends on the type of financing you choose. An SBA loan is the most traditional of the options listed above. You go through a loan approval process and, once approved, receive your funds to pay back with interest. If you decide to crowdfund, you might receive the financing you need as donations, so no need to pay them back. The latter two types work a little differently. A financer purchases your AR, POs, or lends you money against your future merchant sales.
Why Would You Consider Alternative Financing?
Aside from you slim chances for approval at a big bank, many small business owners seek other ways to fund their ventures because these methods are easier to qualify for. You must prove you’re a responsible business owner, but even if you’ve been hit hard in the past and your credit shows it, as long as you can demonstrate an ability to pay the funding back, you’ll likely be approved. Credit history isn’t always the first thing these lenders look at.
Some of the alternative financing comes with lower interest rates, as well. This is beneficial to your bottom line, as it ensures you issue lesser funds to pay the loan off. Alternative financing is also flexible. For example, imagine you take out a merchant cash advance to get your business insurance policies paid for the year. The lender will take a percentage of your merchant sales daily, weekly, or monthly to pay it back. If you have poor sales one day, less money will be taken from you.
Last but not least, it takes big banks months to approve your business loan, if they approve it at all, and you don’t have that time to wait. Thankfully, alternative financing takes less time to approve. In fact, you may receive the money you need within 24 to 48 hours depending on the loan type and financer. If you have an immediate and unexpected need for operating capital, such as a prolonged business closure due to weather, you’ll want to take advantage of a faster loan approval process.
Does your business need alternative funding? That depends. This funding can be used for just about anything from startup to growth costs, so it often makes sense to take advantage of an option that suits your business. For example, if your busy season is the holidays, you may wish to seek alternative funding to purchase extra merchandise to stock up your stores. You can pay it back with your additional profits.