Due to ongoing economic uncertainty, many financial institutions are becoming more conservative when lending money. Easy access to credit isn’t always a guarantee as it once was.
Many small businesses are struggling to get their hands on much-needed funds as a result. This is why they are now looking for other lending options. We’ve looked at some of the most popular alternative ways for people to secure funding for their businesses.
1. Personal Loans for Business Use
Many business owners will consider getting a personal loan to help fund their business. While the name suggests that this type of lending is reserved for personal use, there’s no concrete rule regarding how you can use the money. Personal loans are flexible and can be used for a multitude of purposes, including raising money for your business. Personal loans usually have lower interest rates than credit cards and fixed interest rates, so your monthly payments are predictable.
A set repayment period will normally be in place from one to ten years. Keep in mind that the longer your loan term, the more interest you'll rack up over the lifetime of the loan.
2. Credit Cards
One of the most accessible forms of funding for a business is through credit cards. This could be your personal card or one linked to your business. While you can quickly borrow money using a credit card, the interest rates can be quite steep if you do not pay off your balance in full each month. As of May 2023, APRs on credit cards are reaching 20%.
The ideal way to fund a business through a credit card is if you have a high credit limit and a reasonable interest rate. Certain credit cards can also offer perks, such as cashback on certain types of purchases which you can use to reinvest in your business. If your business is still young and you're unable to secure a credit card with a good interest rate however, it's best to reserve this method for small purchases or emergencies.
3. Merchant Cash Advances
A merchant cash advance, also commonly known as a business cash advance, is a popular option for business owners. Rather than using interest rates, Merchant Cash Advances charge a "factor rate," which is based on the provider's assessment of your business' ability to pay back the debt. They will typically automatically deduct a daily or weekly percentage of your debit and credit card sales until the amount is repaid.
Like credit cards, merchant cash advances will often carry steep interest rates. Keep in mind that the structure of Merchant Cash Advances can make it difficult to manage your cash flow, so ensure you're working with a credible company that's responsive to your needs.
4. Direct Equity Crowdfunding
You may think that raising money from investors is a method of funding reserved for tech startups. These days, it's relatively simple to raise money from a large number of potential investors online. Keep in mind that in return for receiving money from these investors, you will need to give them a piece of equity in your business.
This method is appealing to young companies as it doesn't involve debt. You'll have to ensure you follow securities laws and regulations and track your financial performance. Some companies have raised as much as $5 million in a period of 12 months with equity crowdfunding.
- Reputable marketplace with solid customer service
- A lender network of over 30 lenders and partners
5. Community Development Financial Institutions (CDFIs)
A Community Development Financial Institution (CDFI) is a specialized financial institution that provides financial services in low-income communities. Certain financial institutions like banks and credit unions are able to operate as CDFIs. If your business operates in a low-income or underserved community, you may be eligible for a small business loan from a CDFI.
The interest rates on CDFIs tend to be relatively low and businesses have a higher chance of getting approval compared to a government grant.
6. Microfinance Loans
Microfinance loans typically see businesses getting access to relatively smaller sums than traditional business loans. The cap will usually be $50,000. The types of business owners who will often qualify for microfinancing will be those who struggle to get a more traditional type of loan.
Microfinance loans have low interest rates and require little to no collateral. However, they typically require a short repayment term of one year or less, so if you don't expect to be able to pay back the money, it may not be the best option.
7. Government Grants
Both state and federal agencies will often offer grants for businesses. These funds can be a big boost to small businesses and there is no obligation to pay back the money as a grant is not a loan.
Many different types of grants exist, including those that support completely new businesses, and those that target certain markets or are part of a particular industry. The process of applying for a government grant and getting approval can take some time. You'll have to ensure you meet all eligibility criteria and have necessary supporting documentation.
8. SBA Loans
An SBA loan is a business loan that has a partial guarantee from the US Small Business Administration. Banks will normally be the issuer of the loans. For those that qualify, low-interest rates and flexible terms are attainable. The idea behind this loan is that the government has to pay a guaranteed amount to the lender if the recipient defaults.
To get an SBA loan, everyone who controls at least 20% of the business must sign an unconditional personal guarantee. This means that your personal assets will be accessible to creditors if there’s a default. These strict lending practices must be considered if you decide to go the route of an SBA loan.
9. Angel Investors
High net-worth people will often act as angel investors, providing funding to businesses in exchange for a slice of equity. This will often be a one-off investment. These people can often work closely with the business owner to help grow the business, especially during turbulent early stages. Angel investors will typically only be seen in very early-stage startups.
10. Venture Capital
This is another type of private equity that sees people or institutions investing in startups or smaller businesses that have big potential for growth. Venture capitalists will provide funding and various forms of support to help the business thrive.
These types of investors will usually be looking for companies that have talented teams, have a large addressable market, and have some form of competitive differentiation.
11. Friends and Family
If there are no viable alternatives, business owners might have to turn to friends or family members. The interest rates or payment terms might be too extreme elsewhere, so they go for people within their circle who might have the net worth to provide funding.
Sometimes this will be an investment that does not carry any expectation of repayment or equity. Most business owners try to avoid this funding option at all costs as it has the potential to strain relationships.
12. Invoice Financing
Invoice financing for businesses is a type of funding where a lender provides a loan to a business based on the value of its outstanding invoices. The business can receive cash upfront, which can help improve cash flow and fund operations while waiting for customers to pay their invoices. This is a common option for businesses that can experience cash flow issues.
Through invoice financing, businesses will still be able to cover wages and supplier costs if their customers take a long time to pay.
13. Peer-to-Peer (P2P) Lending
With P2P lending, business owners can directly receive funding from other people. This means that there will be no need to deal with a financial institution like a bank to get your funds. There are numerous platforms that cater to businesses that seek crowdfunding. The specific website will set the rates and payment terms for the borrowed sum.
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In this uncertain economic environment, it's getting tougher for small business owners to secure the business loans and funding they need. As a result, it's more important than ever for small business owners to explore alternative financing options to help them grow and succeed.