The financial needs of businesses are ever-increasing and banks have always been the traditional option for business owners to secure funding. However, it can be challenging due to various reasons like stringent lending criteria, inadequate collateral, or low credit scores. As a result, businesses are forced to look for alternative funding options that can offer them a solution to their capital needs. In this article, we will discuss five alternative funding options that businesses can explore when traditional bank loans are not a viable option.
Invoice factoring, also known as accounts receivable financing, is an alternative funding option that can be a lifesaver for businesses. With invoice factoring, businesses sell their unpaid invoices to a factoring company, who then pays them an advance on the invoice amount. The factoring company then collects payment from the customer, deducts their fee, and pays the remaining balance to the business. This can help businesses improve cash flow and access working capital quickly.
A small business with $50,000 in unpaid invoices needs cash to cover its expenses while waiting for payment from clients in a month. The business sells their unpaid invoices for $40,000 to an invoice factoring company. The factoring company advances $35,000 to the business upfront and collects payment from the clients in the next month. After deducting their fee of $5,000, the factoring company pays the remaining balance of $10,000 to the business, enabling them to cover their expenses while waiting for payment.
Crowdfunding is a funding model where individuals or businesses raise money for a project or venture by soliciting small contributions from a large number of people, usually through an online platform. It’s an alternative to traditional funding options and has gained popularity in recent years. Crowdfunding can be used to finance a variety of projects, from creative endeavors like films and music albums to new product launches. However, it’s worth noting that while having many benefits, it also has its own set of challenges, including the need to build a strong and engaged community of supporters, create an effective marketing campaign, and deliver on promised rewards or perks.
A new business can use crowdfunding to fund their new product by creating a pitch that highlights its features and benefits and offering rewards to backers. They would then promote their campaign on social media to attract backers. If they reach their funding goal, they can use the funds to bring their product to market, but not reaching their goal may result in not receiving any funds, which can be a risk.
Overall, due to it’s high effort costs and “All or Nothing” dynamics, crowdfunding is best viewed as a pre-sale method and not as traditional financing.
Business Credit Cards
Business credit cards are a popular alternative funding option for businesses of all sizes, especially for small businesses, which may not have the same access to traditional bank funding as larger companies. Business credit cards can help with managing expenses, providing a financial cushion, and building credit. However, businesses should use them responsibly and avoid overspending or accumulating high-interest debt. It’s also important to choose a business credit card that offers rewards programs that align with the company’s needs and spending habits.
Business credit cards offer a convenient and flexible way for businesses to access funding, particularly for small businesses with limited access to traditional bank loans. They help manage expenses, build credit, and offer rewards programs.
However, it’s important to use them responsibly and choose a card with suitable rewards.
Peer-to-peer lending is a type of alternative funding where borrowers connect directly with investors to obtain funds. This lending option is usually facilitated through online platforms where borrowers can apply for funding and investors can choose which loans to fund based on their preferences. This option is especially useful for businesses that are unable to qualify for traditional bank loans due to low credit scores or insufficient collateral.
Revenue Based Financing
Revenue based financing (RBF) is a great option that businesses can consider when traditional bank funding is not an option. RBF is a type of alternative financing where capital is provided to a business in exchange for a portion of its future revenues. Essentially, businesses receive funding in exchange for a share of their future revenue. Unlike the traditional bank funding requirement, revenue based financing does not take equity in the business, nor do they require collateral or personal guarantees.
In conclusion, these are several alternative funding options available to businesses when banks let them down. Whether it’s invoice factoring, crowdfunding, business credit cards, peer-to-peer lending, or revenue based financing these options can provide quick access to capital and help businesses achieve their goals. It’s essential to research and understand the pros and cons of each option and choose the one that best fits your business needs.