American business owner, specially small businesses are having trouble getting financing to meet their funding needs. Alternative funding are available in those cases.
Alternative funders, cater directly to small business owners and can consider often-overlooked (by banks, primarily) sources of collateral, like real estate, future revenues, or outstanding client invoices to secure the funding.
Alternative funders are usually more flexible than larger financial institutions on funding repayments (many offer flexible schedules, for example) and often green light funding approvals much faster than banks, often getting business owners within 24-48 hours of the funding application. With speed, convenience and flexibility as selling points, alternative funding are among the fastest-growing financial tools for small businesses available today.
Alternative funding might be the right option for your company in these type of situations:
Starting your business
Expanding your business
Strengthening your business
In each of these cases, you should have a clear understanding of your business goals, how the money will be used, and the terms for each of your funding possibilities.
Primarily, there are two types of online funding that show major signs of stability and growth—peer-to-peer funding and online platform-based business funding.
Peer-to-peer funding rolled out in 2005, as a solution to a vexing problem for business borrowers: “Where can I get a funding if a bank won’t give me one?” A decade later, P2P has really hit its stride, with funding industry analysts estimating the market will grow to $350 billion by 2025.
For borrowers, the combination of lower cost of working capital (relative to traditional bank financing) and more convenience, both P2P and OPB funding are well worth a look.
Online Platform-based Business funding, or “OPB” is defined as funding to businesses that provide a lump sum amount in exchange for a share of future transactions/sales. Much like the structure associated with venture capital deals, the upfront money does come with financial strings attached that go beyond simply paying off a funding—OPB funders want a cut of a company’s futures revenues, too. The analytical firm Research and Markets calls OPB funding “a purchase and sale of future income” that primarily aims at businesses “having strong credit card sales like retail, restaurant and service industry.”
For business owners who can’t get a traditional funding, and who may have less than stellar credit, a merchant cash advance is another route to alternative financing. MCA’s are not a funding. Instead, this form of funding is deemed as the sale of a company’s future credit sales at a discount. A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future sales. Instead of making one fixed payment every month from a bank account over a set repayment period, with a merchant cash advance you make daily or weekly payments, plus fees, until the advance is paid in full. The good news for borrowers is credit can be approved quickly, without volume-heavy paperwork associated with traditional bank small business funding.
Factoring is a source of finance for small businesses. In other words, a cash-strapped business, unable to get desperately needed funds, sells off its invoices, that are called account receivables, to a third party and in exchange, gets the much needed cash. Small business factoring is cited by many industry observers as the “smart alternative” to traditional bank financing. Just like merchant cash advances, factoring can be a viable option for small business owners as factoring financing approvals aren’t based on the business owner’s credit health, but on the company’s clients’ credit health. Factor financing is also good for small firms facing a cash-flow crunch or slow-paying clients.
Invoice factoring can provide immediate working capital to help cover a funding gap caused by slow-paying customers. Improved cash flow: You can keep loyal customers on longer payment terms but still improve your cash flow to help you grow your business. Instead of waiting 30-to-60 days to get paid by customers, small business owners get access to cash within 48 hours, by opting for the factoring route. The size of the factoring market is in the billions, although much of those assets are tied to specific industries, like trucking, retail, construction, and health care.
Crowdfunding is a way for people, businesses and charities to raise money. It works through individuals or organizations who invest in (or donate to) crowdfunding projects in return for a potential profit or reward. With crowdfunding, business owners shouldn’t expect big chunks of money coming via crowdfunding – the average “donation” is only $88. But if you get enough donations of $50, $100, or $150, the funds can add up. Donors who give are passionate about the business idea and want to see it get off the ground for myriad reasons. But with some platforms, if the crowdfunding campaign doesn’t reach a predetermined financial goal, all bets are off, and the monies are returned to the original donors, a result that about 50% of crowdfunding participants experience.
The most successful crowdfunding timelines are between 30 and 39 days. Any less, and you’re not reaching maximum asset volume potential. Any more, and you’re risking oversaturating the market and running, fairly or unfairly, a stale funding campaign. Kickstarter (almost $2 billion raised since 2009) and Indiegogo (over $500 billion) are two popular crowdfunding sites used by entrepreneurs
What if small business owners could raise capital by promising investors a future, set percentage of revenues? That’s the promise behind revenue-based funding. Basically, revenue-based financing (RBF) is a hybrid financing method that fills a need in the growth capital market for companies with approximately $1 to $10 million in revenue and a proven plan for growth.
A credit card is a fast and easy way to get capital, and most funders have cards specifically geared toward small businesses. Unlike other forms of financing, credit cards usually come with a points or rewards system of some kind, and you may be able to leverage that to help your business even further. Small business credit cards have higher cost of working capitals and have credit limits.
In general, the funding option you select depends on where you stand on the small business spectrum. If you’re just opening a new company, you probably won’t qualify for a big chunk of money from any funder, traditional or alternative. But for $25,000 or even $50,000, a peer-to-peer funding option could make the most sense.
Conversely, if your business is up and running, and has a good track record of revenue performance, a merchant funding platform would likely meet your needs. If you’re experiencing slow payment cycles from clients and customers, then a factoring or revenue-based deal makes good sense.
Below is the complete set of rights embraced by the Responsible Business Funding Coalition—use it to shape your best choice for small business funding options:
The Right to Transparent Pricing and Terms
Including a right to see an annualized cost of working capital and all fees
Limited The Right to Non-Abusive Products
So borrowers don’t get trapped in a vicious cycle of expensive re-borrowing
The Right to Responsible Underwriting
So borrowers are not placed in funding they are unable to repay
The Right to Fair Treatment from Brokers
So borrowers are not steered into the most expensive funding
The Right to Inclusive Credit Access
The Right to Fair Collection Practices
To prevent harassment and unfair treatment.
But where banks see risk, other financing platforms see opportunity. This is where alternative financing is an option when other options do not fit your business needs or funding approval criteria.
Alternative funding has emerged as a large player in the financial market due to technological advancements online and inelastic operations of traditional banking institutions.
Banks may be too late in saving their small business customers, many of which are turning to a new financing source—alternative funders.
While figures for such a new industry vary (alternative funding launched in 2005, economists say), the market is conventionally valued at $600 billion by the end of 2020.
While the past 10 years have demonstrated tremendous growth in the alternative funding market, the next decade should show higher growth. Alternative funding is on an upward path, and that’s welcome news to businesses looking for a different path to company financing.
Three Quick Facts:
As of last year, there are an estimated 1,300 companies in the alternative funding space competing for approximately 1% of the total funding market.
Foundation Capital estimates the size of the global non-bank funding market to grow to $1 trillion by 2025.
The peer-to-peer funding market, alone, is expected to reach $350 billion by 2025.
The question for borrowers now, is, which alternative investment category should they pursue?
Even when seeking alternative funding over traditional, you still may need to have strong business credit. It’s important to remember that any credit history takes time and planning.
As your business grows, and you maintain your profile, your business credit will grow too. After you’ve built up a robust and beaming business credit file, you may be able to get traditional funding as well.
Alternative funding represents a legitimate game changer for small businesses frustrated with traditional bank financing options.