Beyond Bank Loans: Exploring Alternative Sources of Business Funding

Beyond Bank Loans: Exploring Alternative Sources of Business Funding

Starting or growing a business often requires obtaining funding. However, not every entrepreneur qualifies for or wants a traditional bank loan. There are actually many non-bank options available that can suit your specific needs and situation. 

Crowdfunding Platforms

One increasingly popular way to raise money is through crowdfunding. By leveraging the power of social media and many small individual donations, crowdfunding allows entrepreneurs to obtain funding from a large number of people for their business ideas or products. There are different types of crowdfunding to consider:

Donation-Based Crowdfunding

With donation crowdfunding sites like Kickstarter and Indiegogo, you present a project, and people can pledge monetary donations without expecting anything in return except perhaps a thank you or branded product at higher donation levels. This is common for creative or community projects that may not result in a profitable business. All funds raised must go towards the proposed project.

Equity Crowdfunding

Some platforms like Seedrs and Crowdfunder allow entrepreneurs to offer actual shares in their business in exchange for investments, turning many small donors into shareholders. This type of crowdfunding is regulated similarly to an initial public offering (IPO) and has income qualifications for investors. Equity crowdfunding offers a chance for returns but also means sharing ownership and returns with investors.

Reward-Based Crowdfunding

With this model utilized by Kickstarter and Indiegogo, donors receive a non-financial reward in exchange for their pledges, such as early access to the product or service once it launches. This rewards donors for supporting innovative ideas while allowing creators to retain full ownership and equity in their businesses. It’s a popular choice for launching new consumer products.

Choosing a Crowdfunding Platform

Consider factors like your target audience, funding goal size, geographic focus, and perks or rewards when selecting between major crowdfunding sites. It’s also wise to research each platform’s funding rates and fees. Creating an eye-catching project page along with an engaging campaign through social media is key to crowdfunding success. While it requires patience and promotion, crowdfunding provides flexible financing and a way to test product-market fit before full commercialization.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending connects individuals who have money to lend directly with individuals or businesses looking to borrow outside the traditional banking system, matching qualified borrowers with investors online. Some top P2P lending sites for small businesses include:

Kiva

A non-profit option ideal for micro financing and cause-based projects in developing economies, Kiva has facilitated over $1 billion in loans of $25-$10,000 to entrepreneur borrowers around the world. It requires no interest or fees from borrowers.

Funding Circle

For loan amounts of $25,000-$500,000, Funding Circle vets borrower credit and financials. Loan terms range from 3-5 years at fixed interest rates set by the site, often lower than banks. Business must be established over two years with positive cash flow documented.

Prosper

Prosper connects borrowers in the U.S. with a wider range of individual and institutional lenders. Loan amounts of $2,000-$35,000 are funded within a month or two at set investor rates based on a rating system. Borrowers must have high credit scores.

Peer-to-peer lending streamlines the process compared to banks and offers potentially lower interest rates for qualified borrowers while providing individual investors with attractive return opportunities. Make sure to carefully research any lender’s terms, rates, and funding requirements before applying.

Merchant Cash Advance

This refers to funding provided to a business according to the percentage of future credit and debit card sales. Typically 10-25% of daily card payments are deducted until the advance plus fees are paid off, usually within 6-12 months. Terms are generally faster and simpler than a loan. Examples of merchant cash advance providers include:

AdvanceMe

AdvanceMe offers advances of $5,000-$500,000 at a fixed daily repayment percentage. Borrower credit scores must be 650+ and a year or more in business with consistent card transactions. Approval decisions are fast.

Bluevine

For qualified businesses over 1-year-old with card sales of $30,000 monthly or more, Bluevine provides $3,000-$100,000 advances at flexible daily repayment percentages.

Fundbox

With Fundbox, loan amounts of $1,000-$1 million can be paid off over 6-18 months based on card and ACH volume. Flexible terms are tailored to each borrower’s specific cash flow.

While merchant cash advances are easier to qualify for than loans, the effective interest rates tend to be much higher due to built-in fees. Evaluate the repayment terms closely to determine if this type of funding makes financial sense for your situation.

Accounts Receivable Financing

Sometimes called factoring, accounts receivable (AR) financing involves taking out a loan with future invoices or receivables from clients/customers as collateral. The borrower immediately receives a percentage of the invoice amounts in exchange for giving the lender the right to collect those receivables. Typical terms work as follows:

  • Advance rates range from 50-90% of total eligible receivable balances. Larger, established receivables command higher rates.
  • After clients pay invoices, the lender deducts its fee (often 1-4% per 30 days) from money collected before returning the remainder to the borrower.
  • Clients are notified of the factoring arrangement and pay the lender directly instead of the borrower going forward.

Major AR lenders provide funding up to $15 million or more for established companies with a steady stream of qualified receivables. While useful for accelerating cash flow, factoring comes with an ongoing cost structure. Weigh the cost versus maintaining tight billing/collections internally.

Equipment Financing

Many growing companies need machinery, vehicles, computers, or other equipment to increase capacity or productivity. While an equipment loan may be one option, there are also lease and financing agreements better tailored for capital purchases:

Equipment Loans

Traditional bank loans allow borrowing funds specifically earmarked for equipment. Loan-to-value ratios are often lower for this secured form of financing versus unsecured working capital loans.

Equipment Leasing

Through a leasing company, businesses can lease essential machinery and spread out tax-deductible payments over time (typically 3-5 years) versus a one-time equipment purchase. Leasing builds in equipment upgrades without major future outlays.

Vendor/OEM Financing

Original Equipment Manufacturers (OEMs) like Deere, Toyota, or Vermeer often provide their own financing programs to approved commercial buyers of their products. Terms, Rates, and incentives are customized by the vendor.

Evaluating total costs, including interest charges and residual values, is essential when determining if leasing, financing, or outright ownership makes the most economic sense for a company’s equipment needs and budget. Proper collateral and creditworthiness are still factors to qualify.

Business Credit Cards

Entrepreneurs who have an established business should consider applying for business credit cards to take advantage of 0% introductory balance transfer options or rewards perks. Most major issuers cater to small businesses with options like:

  • Chase Ink Business Preferred: Earn 3 points/$1 on the first $150,000 spent each year on travel, shipping, internet/cable/phone services, and advertising with social media platforms/search engines. Annual fee waived first year.
  • American Express® Business Gold Card: 4X points on the two categories that earn the most, including purchases of $5,000 or more in select business categories. $295 annual fee.
  • CitiBusiness/ATM Card: Fund your business with competitive cash advances and APR through ATM withdrawals that earn rewards. No annual fee.

The right combination of incentives and credit limits from multiple business cards can help businesses consolidate balances from other high-interest debt or fund short-term operating needs more affordably. Just avoid interest charges when balances aren’t paid in full each month.

Venture Capital

For rapidly growing, high-potential startups with large capital demands and ambitious scaling plans, venture capital may provide the right solution. However, obtaining VC funding is a long, competitive process that significantly dilutes the current ownership position:

  • Target companies demonstrate an innovative/disruptive product/service with a potential billion-dollar exit (IPO or acquisition).
  • Founding team and capabilities matter greatly, especially relevant experience.
  • Traditional VC funding kicks in after an initial funding round (Seed) of $1-5 million and before a later Series A round of $5-30 million.
  • VCs take significant equity stakes (10-30%+) that are further diluted by later rounds if the business continues expanding according to projections.
  • Major VC firms in tech hubs evaluate hundreds of business plans to find the next potential multi-bagger investment.

While demanding, venture capital can supercharge business growth like no other funding source for the right high-concept ventures ready to scale rapidly. The startup must demonstrate it is the category leader with the potential for unicorn status or massive buyout to pique VC interest.

FAQs

What is the simplest funding option to obtain?

For many new or small businesses, the quickest sources of capital may be a business credit card, small merchant cash advance, or online loan through peer-to-peer lending. Just be sure to understand all applicable interest charges and repayment terms upfront.

How long does funding typically take to receive?

Funding timelines can range from only a few days for smaller merchant cash advances or credit cards to weeks for peer-to-peer loans to months for the venture capital process. Crowdfunding campaigns of 30-60 days are common, while larger loan/lease applications may require 4-6 weeks.

Can poor personal credit impact business funding?

While business funding looks primarily at business credit and metrics, personal credit will still be a factor considered by many traditional and alternative lenders. Weak personal credit could lead to higher rates or a denied application. Address any personal credit issues proactively, if possible.

What expenses can different funding pay for?

Most alternative sources are flexible and can fund operating capital needs like inventory, payroll, or vendor payments. Merchant cash advances are suited for credit card processing. Equipment loans/leasing, specifically providers of machinery/vehicle purchases. Venture capital is targeted towards long-term growth. Consider restrictions for donations/rewards crowdfunding.

How can I improve my chances of approval?

Thoroughly researching lender requirements beforehand and ensuring all application materials like financials are complete and accurate are key. Having a strong business plan demonstrating revenue/job growth potential also helps. Asking for guidance from a small business advisor or grant writing professional may optimize applications.

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