5 Best Alternative Small Business Financing Solutions in 2020

Capital is the first and foremost requirement for any business.

But new startups and entrepreneurs are usually short of capital because initially, they only have ideas that they are selling. They need money to start the business and expand it. It leaves entrepreneurs and business owners with the option of seeking out alternatives in the form of a line of credit for businessor other financing solutions that will fulfill their capital requirements.They might obtain initial funding from friends and family members, but they need a lot of cash once they are in the market.

Of course, there are banks and financial institutions that have ready cash available. But working with traditional lending institutions is not as easy as it seems.First of all, they have very stringent requirements when it comes to loan approvals. Secondly, they are not interested in working with anyone who has a bad credit score or seems riskier to them.

There are alternative funding options available for small businesses. The list below discusses some of those options and how they can be utilized.

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1. Online Lending

With technology seeping into every nook and corner of our lives, it is evident that sooner or later, it will enter the financial arena too.The modern digital lender caters to the same phenomenon. Digital lenders or peer to peer lenders do not have physical offices. Rather, they operate through the internet.The borrower can apply for a loan online. The online lenders assess the loan application based on their standards and objectives.They have creative ways of loan assessment, which – in many cases – allows them to approve applications that may have been rejected by traditional borrowers. This does not mean that they will disburse the loan to anyone who comes to them with a request. Instead, it means that they do not work with the bank’s mindset and, consequently, have fewer restrictions.The loan approval process is very short and does not take a lot of time. Once the loan is approved, disbursement is made within one or two days. One example of a digital lender is ‘Worthy.’ It is a platform that allows individuals to invest in small businesses in return for a reasonable profit.

2. Crowdfunding

Most people are aware of ‘Kickstarter” and other platforms where people make contributions towards a certain project. It could be a feature film or the latest innovation in smartphones.

However, many people do not know that this kind of crowdfunding is also available for small businesses. 

Crowdfunding is an idea through which small business owners can reach out to the wider public to secure working capital for their businesses. It could be in the form of a loan or an equity stake.A small business seeking to obtain crowdfunding must start a campaign on a website that may charge a percentage of the capital raised through it. The borrower is required to share company financials and projected income. There is one added advantage of crowdfunding: the small business owner can set their terms of the loan, including the repayment frequency, and interest rates, etc. Crowdfunding is the most viable option when a small business already has a large fan base. Several crowdfunding sites allow small business owners to opt for this kind of alternate financing.

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3.Invoice Financing

Invoice financing is a kind of an alternate loan that has only caught the eye of small business owners very recently.

Invoice financing is the type of funding in which the borrower would sell his unpaid invoices (the ones that have been raised on customers of the business) to a financing company.

The invoice financing company carries out an analysis of the invoices based on their past repayment history along with many other things related to its financial strength. The financing company – after being satisfied with the health of the invoices – would purchase the invoices from the small business owner at a pre-agreed discounted price.

The financing company will also charge a financing fee that is also mutually agreed between the two parties.

4. Loans for Working Capital

Working capital is defined as the amount of cash required for running the daily operations of the small business.Small businesses often find themselves in such jams when they are in urgent need of working capital, and they are short of cash mostly due to unpaid invoices. This is a common problem because small businesses that are working with big companies must cope with the three-month payment cycle of these corporations. Many alternate lenders aim to fill this short-term cash flow gap for small business owners. 

The period of these loans is concise – around three months or a single quarter. From the lenders’ point of view, it is a safe bet.The borrower would use this cash for meeting their short term requirements and pay off the debt once their own money is available. 

5. Friends, Family, and relatives

Startups and entrepreneurs usually turn towards their friends, family members, and relatives when they need cash.

This is also a great option when the business is running, and there is a need for cash.

The best thing about working with close acquaintances is that they know you personally. They would usually believe in you, and you wouldn’t have to show them all the documents that need to be submitted to other lenders.

Another benefit of borrowing from friends and relatives is that you don’t need to haggle over the terms and conditions of the loan or the interest rate.

You can be sure that these people want to see you succeed in your business and will always wish you well. This also brings along a responsibility to pay them back on time, with their fair share of profit. 

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The Final Word

The year 2019 has seen many innovations in every field. Finance is only one of them. 

As the requirements for traditional loans become more stringent, small businesses are forced to seek out alternate options for securing loans.

Some of those alternate options have been discussed in the above article. One of the most important reasons why small businesses are going for non-traditional loans is because of their creative ways of loan assessment.

While a bank or a financial institution will work with a pre-defined SOP, an alternate lender will subjectively analyze every loan. Their approach is creative, and – in many cases- they would sanction loans with the minimum documentation.

Small businesses are interested in fulfilling their cash requirements. Whether the lender is a traditional one or an alternate one, it does not affect them in any way.



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