Alternative financing is often the solution to funding issues for small businesses, but many small business owners have never even heard of it. There’s a belief among many entrepreneurs that the only place to get a loan is a bank. That type of thinking is inaccurate at best and possibly even downright harmful for small businesses. The endless requirements of traditional loans can weigh down a small business and push owners to accept bad terms and oppressive interest rates from banks.
What Is Alternative Financing?
Put simply, alternative funding is any kind of financing that is offered by private parties instead of large banks. Sometimes, alternative lenders are individuals, but usually, they’re companies dedicated completely to small business lending.
As private lenders, these businesses can set their own rules for accepting or rejecting loan applications. This provides more flexibility and opportunities for small business owners.
What Are the Benefits of Alternative Lending?
Alternative funding programs offer several advantages:
- Credit ratings: Banks heavily base their decision to accept or reject loans on your credit score. A poor credit score is a death sentence on most loan applications. Even average credit at a bank can mean paying excessive interest rates. In contrast, alternative lenders rarely let poor credit impact applications if other factors are good.
- Cash flow: Businesses that have cash flow issues can rarely qualify for loans or lines of credit. This is sad because those tools help improve cash flow. Alternative financing can get around this obstacle by offering cash advances instead of loans.
- Down payments: Even when you can qualify for a traditional loan, you may discover that the amount offered is far less than what you need. This may force you to have funds to cover a huge down payment. Alternative lending has a far wider range of options for down payments, sometimes even 0% down.
What Are the Best Alternative Financing Options?
There are many kinds of alternative lending programs. Here are some of the most popular:
- Equipment financing: This is an asset-based loan where the equipment you need acts as collateral for the financing. In return, you get good interest rates and access to the equipment you want.
- Merchant cash advance: This advance provides immediate funds in exchange for future credit card sales. No debt is placed on the books, and repaying the balance is very flexible.
- Factoring: This lets you sell unpaid invoices right away for working capital, thereby boosting cash flow.
- Purchase order financing: This provides direct funding to your suppliers to complete large and unexpected orders. Many businesses use purchase order financing to position themselves for rapid growth.
Alternative financing can adapt to the needs of your business, and there are many more options available compared to traditional loans.