These days, loans for your small business or other venture requiring additional capital go well beyond your neighborhood brick and mortar bank. A host of funding options exists today, such as online lending, angel investors, venture capitalists, grants, crowdfunding, and of course, asset-based lending from The Commercial Finance Group.
Why does it matter that there are multiple options beyond traditional bank loans? That’s exactly what we’re going to cover in today’s blog post from our working capital and asset based financing company. Additionally, we’ll also go over the different alternative financing options, primarily for business, to see how they shape up to both traditional bank loans as well as asset-based loans. With The Commercial Finance Group, you can maximize and optimize your business dynamic whether you just started a brand new business or you’ve been steadily growing your small business for some time. Let’s explore a variety of alternative financing options.
Why Alternative Financing?
As we’ve mentioned before, asset-based loans and other alternative forms of business financing are an attractive option for many business owners. This is primarily because bank loans, while expensive, also severely limit you as far as what your business loan can do and how it is used. Additionally, many banks may not even consider giving out loans for small business owners in the first place.
When applying for a traditional bank loan for your business, you’ll have to clearly state how the loan is going to be used, and if the loan is used for anything other than it’s intended for, then you may have to pay significant penalty costs for breaking the terms of your loan contract with the bank. With far less penalization and more freedom to allocate the business loan at your discretion, it is easy to see why financing solutions beyond the bank are an attractive option for many business owners.
Online Lending
Though a rather broad term, online lending options offer a convenient, easy-to-use system that’s more efficient than conventional brick and mortar bank loans. Therefore, in recent years, online lenders have become a popular alternative to traditional business loans.
The popularity of this loan vehicle lies in its speed. These platforms have the speed advantage – an application only takes about an hour to complete, which is pretty quick compared to traditional bank loans for your business. Plus, the decision and accompanying funds from the loan source can be issued within a matter of days as compared to weeks or even months. In fact, Larry Summers, economist and former U.S. Treasury Secretary, expects that online lenders will eventually reach more than 70 percent of small businesses due to the ease and quickness of online lending.
Angel Investors
Angel investors are mainly tailored toward very early-stage or small startup companies. Generally, angel investors will invest in these type of companies in exchange for about a 20 to 25 percent return on their original investment. Though the investments of angel investors don’t always turn out to be overly profitable, many large-scale companies received what would be some of the most important small business loans in history, including Google and Costco.
Venture Capitalists (VC)
Venture capitalists are interested in investing in companies that are new startups, considered to have both high-growth and high-risk potential. Venture capitalists also provide more than just financial assistance to a fledgling business, too. Generally, venture capitalists can offer advice to entrepreneurs on whether the product will be successful or not, and what the company specifically needs to do to bring something to market. This wealth of advice that your small business can get from venture capitalists comes from the fact that venture capitalists have the ability to specialize and focus on specific industries.
Grants
As another form of alternative financing, grants are primarily oriented for businesses that are focused on science or research. Grants are more or less free capital provided by the government to help fund a project, experiment, study, or business venture deemed worthy of a government investment. Recipients of these grants are required to meet federal research and development goals and have a high potential for commercialization, so grants are more of a niche kind of alternative financing method. If your practice happens to qualify for a grant, however, the SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.
Crowdfunding
Crowdfunding has enjoyed a significant gain in popularity over recent years. Crowdfunding on sites like Kickstarter, Indiegogo, and Community Funded can give a much-needed boost to financing small businesses, depending on what your product or service is. Crowdfunding sites allow businesses to pool small investments from a number of investors instead of having to look for a single, lump-sum investment from a third-party investment source.
Crowdfunding is a great way to get a good idea of the public’s thoughts and feelings toward your product or service. If it’s a fresh idea that could really benefit them, then the online community will come together to help you hit your funding goal. Keep in mind that your business will be strictly held accountable for what it does with the money raised from crowdfunding, similar to a traditional bank loan, except that you actually get to test the waters of your target market. Also, crowdfunding platforms tend to have some level of payment-processing fees, or they’ll require businesses to raise their full stated goal in order to keep any of the money that was raised. In this case, just remember to read the fine print.
Credit Cards
To be clear, credit cards are probably not the best way to attain alternative sources of working capital. Due to restrictive terms and high-interest rates, using a credit card for small business financing is certainly not the most optimal method of raising money for your much-needed business operations. Though not ideal, credit cards are technically an option that’s worth being aware of, but you should also be cautious. If you somehow find yourself in a situation where you are using a credit card or multiple credit cards as a source of financing for your small or growing business, then be sure that all of your payments are made on time. Additionally, try to negotiate the lowest possible interest rate with your credit card company.
Peer to Peer Financing
Just like lending your friend some money to buy lunch, peer to peer financing serves as a simple, straightforward way to transfer funds between one individual to another. Peer to peer lending transactions works a lot like an eBay transaction, for instance, in the sense that people are bidding. You post the amount of capital that you need on a peer to peer lending site and the maximum interest rate that you’re willing to pay to acquire that particular amount of capital. After you post your desired funds and interest rate maximum, potential lenders will then bid on your loan. Note that in order to participate in peer to peer financing, however, you have to have a good personal credit score.
Merchant Cash Advances
There sure are a lot of different business financing options beyond traditional brick and mortar bank loans, aren’t there? Another form of alternative financing for your business is merchant cash advances. Here’s how merchant cash advances work: When a company gets a merchant cash advance, the deal is bound by the purchase and sale of future credit card income. Thus, no regular fixed payments are required by the company. The lender then collects a set percentage of the company’s daily credit card sales.
Merchant cash advances are not always a recommended option for business financing, however, as merchant cash advances can be quite expensive. Merchant cash advances also don’t tend to have a fixed interest rate right off the bat, so that could either hurt you or help you depending on your credit score, your cash flow situation, the volume of your business, and so forth.
Finally, Asset-Based Lending
This was probably the form of alternative financing for businesses that you were waiting for. While there are multiple small business financing options that work great for many different kinds of businesses, asset-based loans provide proven, secure loan options that have helped businesses in different industries expand and exceed their growth goals.
With an asset-based loan, your business can use the funds exactly as you see fit as the business owner, instead of dealing with the frustrating restrictions that banks attach to their loans. Over the years, The Commercial Finance Group has learned that many healthy companies choose asset-based lenders like us due to the flexibility, revolving lines of credit, fewer financial covenants, and security of being backed by their own collateral. At The Commercial Finance Group, we want to see your business succeed just as much as you do. If you’re in dire need of cash flow solutions, small business lending or working capital solutions for your company, then don’t wait another day! Get in touch with us today to learn more about how we can help your business grow and succeed.
