The lending landscape for businesses is changing constantly. Cash strapped small businesses must keep up with these fluid developments to sustain themselves and continue their growth.
It would be unwise to count out traditional forms of business lending, but in truth more and more entrepreneurs are veering towards alternative sources of finance to grow their business further. What should you do in this constantly evolving economic climate?
What’s the first thought that enters your mind when you hear the terms financing and funding? I am fairly confident that you are visualising walking into a bank, filling out some forms, answering a few questions and walking out with your money. Sadly, the process of acquiring funding is not as straightforward.
If you are attempting your first business venture or don’t have a great credit score, you are going to find it almost impossible to get a loan from a bank.
Any of the following could hamper your chances of being approved for a loan:
- Your business is less than two years old
- Your credit score is below 640
- You need to borrow less than £250,000
If you don’t fulfill any of the above mentioned criteria, your chances of being approved for a loan is not great. Even if you tick all the right boxes, you will still have to jump through more hoops by following a meticulous process.
Enter alternate finance providers.
Such lenders play an important role of filling the void for about 80% of small business owners who remain ineligible for traditional bank loans. Alternative lenders don’t have to follow the same regulations laid down by regulatory bodies, which allows them to pick and choose, who they want to lend to and how much they want to lend.
Benefits of Alternative Financing
1. Less Stringent Approval criteria
As mentioned before, acquiring alternative finance is much easier than a traditional bank loan. You will still have to showcase your ability to pay back the borrowed amount but the vetting process is more balanced than the traditional bank process.
2. Abundance of Options
Banks don’t consider small loans that are less than £200,000 worth their time. So, if you require a small loan to keep your business’s cash flow ticking along smoothly, the chances of getting that amount from a bank is practically zero.
3. Lower Interest Rates
The bureaucratic nature of traditional funding sources like a bank, means that you will be offered very little flexibility with regards to interest rates. The alternative funding market on the other hand is extremely competitive, which leads to reduced interest rates for borrowers.
4. Faster Approval Process
Credit unions and banks are known for dragging out the approval process for a loan. Multiple people have to view an application before it can be approved, which means that the entire process can go on for weeks or months. Alternative lenders, especially those who operate online can process an application within hours. Worst comes to worst you will be approved for funding in the same week you apply.
Common Types of Alternative Financing
If you have decided to shop around in the alternate finance market, you will be provided with many different options. As new products are being added each month, it is impossible to come up with a comprehensive list, but I have outlined the most common ones below:
If your need is very small, a microloan might be the best option for you. These loans are offered over a short term and typically don’t exceed more than £25,000, spread out over a five year period. There are plenty of micro-lenders looking to lend, so acquiring funds through this route is not especially difficult.
Over the last few years crowdfunding has emerged has a massive source for alternate finance. Two types of crowdfunding options are available including:
- Standard crowdfunding and
- Equity crowdfunding
Standard crowdfunding does not need you to offer a lot in return, whereas in the second type you will have to waive equity in return for funding.
3. Merchant Cash Advance
If your business is doing well on the whole, but is presently plagued by cashflow issues, merchant cash advance might be the best option for you. This source of alternative funding is predicated on future credit card transactions and sales. In this, the lender will purchase some of your business’s future credit card receipts and use it as collateral for the borrowed amount.
Alternative lending platforms continue to grow in popularity online, which has led to the formation of many more peer-to-peer networks. You can be creative with the funding options available to you from P2P lending, once you are familiar with all the options available.
Cash flow finance, invoice finance, education finance and property finance are some of the products you can avail through peer-to-peer lending.
Irrespective of what banks, credit unions, Small Business Administration and other financial institutions claim, it is becoming increasingly bothersome to acquire traditional loans. The flow of money is not the same as it used to be. If by some good fortune, you get approved for a loan, it is very likely that the terms you receive are not very appealing.
But, with the rise of alternate finance options, small business owners have access to solutions today that didn’t exist previously. Ensure that you weigh the pro’s and cons of all the options available to you meticulously before you make a final decision.