Unlocking Financial Potential: Empowering SMBs with Alternative Financing Solutions

For decades, the only place it seemed that you could apply for a small business loan was your local bank or credit union. If you had a poor credit score, you might have to apply for one with the Small Business Administration (SBA) instead. However, online lenders have disrupted the market in recent years by offering a wide range of alternative financing options, like crowdfunding and P2P lending.

These new financial institutions bring fresh thinking to the subject of business financing. Some work with startups. Others are happy to provide business lending to entrepreneurs with poor credit histories. Many even offer finance to nonprofits.

So, please don’t think that traditional bank loans are your only option if you’re looking for funding. There has never been as many different types of financing available for business borrowers as there is today.

In this article, we cover:

• The newer types of alternative funding

• More traditional alternative lending options

• Three alternative financing options you may not have considered

5 New Types of Alternative Funding

Many alternative lenders provide funding to businesses via online platforms and are often referred to as fintech companies. Here are five alternative financing solutions offered online.

1. Crowdfunding

Crowdfunding is a way to get money into your business where you don’t have to make any monthly payments back to lenders. Instead, you offer rewards and sometimes equity (a shareholding) in your business to your backers.

Getting crowdfunded is often much harder than getting traditional financing from a bank though. Your proposal will be just one of hundreds, sometimes thousands, of competing projects vying for attention. Presentation-wise, crowdfunding platforms look like online marketplaces, not dissimilar to Amazon or eBay with endless pages of options.

According to the CrowdDataCenter, only an average of 23.6% of projects get fully funded. Remember too that you only get any money if your project meets its revenue target. So, if you choose crowdfunding, you have, on average, a one in four chance of getting the money you need.

2. Peer-to-Peer Lending

Peer-to-peer (P2P) lending is like a cross between a crowdfunding site and a traditional business loan.

P2P sites offer term loans — in other words, loans that have an agreed length of time and an end date. You make monthly repayments on them, and each repayment reduces the outstanding loan amount. Each P2P loan is subject to interest rates, and borrowers with lower credit scores will have to pay higher interest rates.

What’s different is that with a bank loan, the funding source is the bank. But with a P2P loan, the funding source is hundreds or sometimes thousands of investors. If enough of them back you, then you get the capital you need.

What’s in it for your investors? They earn more in interest from you than they’d earn from a bank.

Be aware, however, that there is a strict loan application process on many P2P sites. You have to pass both eligibility and underwriting requirements before your loan is offered to investors. You’ll also need to submit a business plan in many cases.

P2P lenders are very careful because they don’t want their investors to lose money.

3. Business Line of Credit

A business line of credit works in many ways like a credit card.

With a credit card, you have a limit — the maximum amount of money you can borrow. You also have a balance — that’s how much of the limit you’re using. Then, when you pay back your balance, you can borrow that money again.

A business line of credit operates on the same principle.

Let’s say that you’re approved for a business line of credit worth $100,000. You can borrow up to that limit as long as you meet the repayment terms. Many line of credit providers require you to make a minimum repayment plus interest every month.

4. Working Capital Advance

Working capital advances are there to help business cash flow, and they are a popular alternative financing solution. They’re great for covering shortfalls caused by unexpected bills or a couple of slower sales months.

Like a term loan, you agree with your lender to borrow a sum of money. That’s paid to you in full upfront, and you have an agreed time in which you pay it back, usually by monthly repayments.

5. Buy Now, Pay Later

This is a really handy way to help your customers purchase from you. While this is not a direct loan to you, what it does is put more cash in your bank. That’s because you’re allowing customers to bring forward purchases they might not otherwise be able to buy in full right now.

When we think of Buy Now, Pay Later, many of us think about PayPal, Afterpay, and Klarna, which target B2C sales.

But there are now a few alternative financing providers, including Backd, that offer the same service to companies that sell to other businesses.

3 Alternative Financing Options From Traditional Lenders

Alternative financing solutions aren’t just provided by fintech companies. The following options have been available for many years now.

1. Merchant Cash Advances

If you take payment from customers on debit or credit cards, you can apply for a merchant cash advance.

With a merchant cash advance, you can usually borrow up to three or four times the amount of credit and debit card payments you take per month. Once you have the money, you then pay a bit back every day from new credit and debit card reconciliations.

So, if you agree to pay back 15% of your credit and debit card transactions and you take in $1,000 a day on cards, your lender will take $150 of that, and you only get $850. You keep making payments like this until the balance and the charge are paid off in full.

2. Credit Card Funding

Many startups fund the opening of their businesses by borrowing on credit cards.

Credit cards can sometimes be easier to get than traditional bank loans for startups and early-stage businesses if a provider has a low credit score.

The downside of credit card funding is that it’s very expensive and, depending on who you apply with, you may not be able to borrow as much as you need.

3. Invoice Factoring

You might think that the only good invoice is a paid invoice. We understand that.

However, there is an alternative finance solution called invoice factoring that you might be interested in if your business struggles with cash flow because of poor payers.

Invoice factoring, sometimes called accounts receivable finance, works like this. You send an invoice to the lender, and they’ll pay you up to 85% of its value upfront right away. Then, when your customer does settle up, you receive the rest minus a factoring fee.

This is only available to businesses that sell to other businesses.

Other Alternative Business Funding Solutions to Consider

There are three other funding options available to you if none of the above appeals.

1. Angel Investors

Angel investors are great for startups. Angels are normally successful business people who have spare capital and want to invest it in an early-stage business.

Angels will give you the cash you need to launch or grow. They can also plug you into their network of contacts to help you get a faster start. You don’t have to make monthly repayments to an angel, but you do have to give up some of the shares in your business. You may also have to offer a seat on the board to your investor or their representative.

The goal of an angel investor is to grow your business to the stage where they can cash out by selling their shares to a venture capital company.

2. Venture Capital

Angel investments are normally for between $15,000 and $250,000, whereas the average venture capital investment is around $11.7 million, depending on which stage of the development cycle you’re at.

To get funding from a venture capitalist, you need to show that your business is going to grow very quickly over the next 2-3 years.

3. Real Estate Refinancing

One way to access money at lower interest rates is to take out a loan where you offer either residential or commercial real estate as collateral.

Because you’re offering bricks and mortar as security, your chances of being accepted are much greater. Bear in mind, however, if you don’t keep up repayment on any loan secured by real estate, your lender may repossess it and sell it to recover any outstanding balance.

Get Alternative Financing With Backd

As a leading alternative financing provider, Backd offers three solutions to businesses.

You can get between $50,000 and $750,000 in financing with a business line of credit. With a working capital advance, you can get between $25,000 and $2 million in funding.

Or you can offer your business customers a buy now, pay later option and receive up to a 1% referral fee for each financed purchase with BackdPay.

Apply in just three minutes today to get the financing you need as soon as tomorrow.