6 Alternative Financing Options (and 3 Things to Know About Them)Karen Axelton
Are you looking for financing for your small business? Traditional bank loans are not your only option. A new report from The Kaplan Group spotlights the growth of alternative financing options for small businesses offers some insights.
The global recession, combined with the growth of new technologies that can streamline and simplify the process of vetting loan applicants, has given rise to a wide range of alternative financing options. Here are just a few of the alternative financing options out there:
- Lending Club has made more than $10 billion in loans, mostly to individuals
- Kickstarter has raised over $1.6 billion for startup businesses
- Prosper has made $5 billion worth of loans — up from $2 billion just one year ago
Among the different financing sources you may want to consider are:
- Merchant cash advances, which give you an advance on future credit card sales
- Purchase order financing, which gives you loans based on in-hand purchase orders so that you can buy or manufacturer what’s been ordered
- Microloans, typically under $50,000 but often as little as a few hundred dollars depending on the source
- Crowdfunding, in which businesses seek investment online from individuals and/or accredited investors
- Peer-to-peer lending, in which individuals make loans to each other online using matchmaking platforms
- Factoring, in which a business sells its unpaid invoices to a factoring company in return for a percentage of the invoice total
While many of these methods have been around for years, technology has made them more widely available to a wider range of businesses, and made it easier for companies to quickly approve loans using algorithms to assess a company’s credit worthiness.
The benefit alternative financing is that these loans are typically easier and faster to obtain than traditional bank loans. However, there are some important cautions to keep in mind when considering alternative financing options.
- Compare interest rates carefully. Different lenders may describe their interest rates in different ways. Take time to actually do the math and figure out the cost of the capital you are getting. Rates can vary widely.
- Read the fine print. In many alternative financing scenarios, you’ll repay the money borrowed with a daily direct payment from your revenues. In some cases, this payment varies based on your sales that day; in others it is a fixed amount — which can be difficult if you’re going through a slow sales period.
- Make sure you’re borrowing for the right reasons. Most alternative financing methods are meant for short-term financing needs. If your business has had long-term cash flow issues, these loans might just put you deeper into a debt hole. Use alternative financing for situations such as bridging a temporary cash flow gap, taking advantage of an unexpected opportunity, or getting the capital you need to fill a big order.
Learn more about each of these alternative financing methods, as well as what to know to help you get the best deal, at The Kaplan Group website, where you can also use their matching tool to find the best alternative financing source for your business.
Karen Axelton is Chief Content Officer of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses.