Small Business, General Finance, Cash Flow

Examples of Alternative Business Funding

Posted by Factor Funding Staff on November 21, 2022

alternative business funding

When your business needs funding, you find out pretty quickly that the playing field is not even. While large companies tend to have cash reserves and the ability to take out loans at favorable interest rates, smaller businesses and startups don’t have that advantage. 

Traditional lenders often require a company to have at least two years of business finances and an excellent credit rating before offering funding. According to the BizCredit Small Business Lending Index, big banks accounted for just 13.6% of small business loan approvals in Q2 2021. Alternative lenders accounted for 24.5% of loans for the same-size companies. 

For businesses that are unable to obtain loans and need cash quickly, there are a variety of alternative business funding options that offer fast approval, low borrower requirements, and flexibility.

A Little About Alternative Funding

Alternative funding is a way for a business to obtain capital outside the framework of the traditional banking system. Many alternative lenders are considered fintech lenders because they rely on technology to run their financing operations. These entities include:

  • The online loan marketplace
  • Crowdfunding platforms
  • Third-party payment providers such as Paypal
  • Cryptocurrency such as Bitcoin
  • Debt or invoice factoring companies

Most of these entities accept a different level of risk than traditional lenders and may use alternate methods for determining loan eligibility.

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Preparing for Alternative Funding 

As seen in the list above, there are many options for alternative funding. Since each operates differently, you should first determine your business' specific financial needs before searching for lenders. That way you can select the right lender for your circumstances.

Meeting with a small business expert or attending training provided by the Small Business Association (SBA) could also be helpful.

Alternative Lending Options

When looking for business funding, you need to be familiar with different types of lenders. Below are a few of the most common alternative lenders.

Community development finance institutions (CDFIs)

Community development finance institutions (CDFIs) offer capital to small businesses and microbusiness owners. The terms are usually reasonable and can help if you have a rocky financial history, such as medical debt or job losses. They also don't ask for as much collateral as a traditional bank.

Venture Capitalists

Venture capitalists provide funding but take part ownership of your company in exchange for capital. Your business must show high growth potential and a competitive edge to qualify. If you snag venture capital, you also get industry connections and helpful business directions.

Partner Financing

Partner financing funds growth in exchange for special access to your service, products, distribution rights, sales, or a combination of those elements. Partner financing is more an equity sale than a loan and may be royalty-based. The partner is often a large company in a similar industry.

Angel Investors

Angel investors are individuals who like to invest in startups or early-stage businesses that might not have the growth potential to attract venture capitalists. Most are capable of guiding your business and are usually experienced businesspeople who can show you ways to preserve your cash.

Invoice Factoring

Invoice factoring or financing is an agreement with a factoring company that pays cash for outstanding accounts receivable. They pay a portion of the invoice’s face value in cash that you can use for business operations and expansion. 

These lenders will assist your business is different ways and have different methods of providing funding.

Types of Alternative Business Loans and Funding

Each of the following types of funding mechanisms provides cash in different ways. It's up to you to determine which fits your business best. 

  • A line of credit means a revolving credit line used to access fast cash for working capital or expansion. Most are offered by a bank, credit union, or online lender.
  • Online loans are convenience and quick. You can easily meet the qualification requirements, but you will pay higher borrowing fees than a traditional bank.
  • Term loans, or installment loans, provide cash now that you repay over a set period. You can find fixed, and variable interest rates, and banks and online lenders offer term loans.
  • Short-term loans come from online lenders and have a short repayment schedule, typically three to twelve months. You generally pay higher fees, usually as a factor rate.
  • A merchant cash advance is provided in advance of expected future earnings. You repay them as a percentage of your daily sales. Most have a fixed fee, but it can be expensive.
  • Personal loans rely on your personal credentials instead of your business credit rating. Many new business owners use this method.
  • A business credit card is used to pay for your business expenses. Many have a 0% introductory offer, but you need to consider the rate the card charges after the introductory period ends. However, other perks include cash back or points for purchases, which can be handy.
  • Crowdfunding involves raising capital from peers online, usually in exchange for interest, rewards, or equity in your business.
  • The US Small Business Association backs high-quality loans with low interest rate plans for small businesses. However, it can be difficult to qualify.
  • Debt factoring companies pay cash for unpaid invoices and collect payments from your customers. Fees can range from 1% to 3%, higher than a traditional lender, but you receive the cash faster, too.

Before signing an agreement for applying for a loan, make sure you read all the details and understand all parts of the agreement to avoid being trapped in a predatory financing partnership.

Bottom Line

Finding a lender can be difficult for new and small businesses. Banks want high credit ratings and collateral to hedge against risk. Often, large companies are the only ones that qualify. 

Alternative business funding is available in many forms for any type of business. You can obtain fast cash for growth and operations and take advantage of more opportunities. Find the one that works for you and watch your business take off.

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