Every business requires funding at some point of time or the other. While you may have funded it initially using your own money or by borrowing from sources, continuous growth demands capital. It is here that alternative funding can help. Small business owners tend to depend on loans from SBA or Small Business Administration in the US.
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How to get financing for your business
At times, small businesses do not qualify for SBA loans, or these businesses may need more flexible and short-term loans. What should you do then? Alternative lending can be a solution in such cases. These lenders provide different ways for you to get funds to scale up your business. Since alternative business funding can be of different sizes, you must identify the right solution for your requirements.
Alternative financing may turn out to be costlier than traditional financing but it offers many advantages. Businesses can get easier approvals, faster turnaround, and negligible impact on credit score. While all these benefits appear appealing, alternative funding is not right for all businesses.
Signs that your business needs alternative funding:
- Refusal by banks: Even if your business needs capital to expand, banks may decline your loan request on many grounds. Reports suggest that a traditional bank typically declines more than 70% of applications.
- Customer gap: This refers to the difference between the date you invoice your client and the date on which he pays the bill. This could be anywhere between 1-3 months but that is a long period. Service industries particularly need alternative financing because by the time they submit invoices, the services have been done. Waiting for customers to pay up may be hard because manufacturing units will have to take care of the payroll during this period. This creates a big gap in the cash flow and the cycle keeps repeating itself, worsening over time. This is when your business can benefit from alternative funding. It gives the cash flow which you may use once invoices have been submitted to customers.
- Limited operating history: When you have launched a startup, or running a business that is new with limited operating history, banks are hesitant to offer loans. This is why many young entrepreneurs and startups choose alternative financing.
- Poor credit history: The credit score is one of the first things a bank sees to decide whether to loan you money. If you have a poor credit history, it can go against you. The bank will either disapprove the loan request or charge you unusually high rates. But with alternative financing, you can find a factoring company which respects your credibility. Approvals are quick and easy compared to traditional lending.
- Unwilling to take on debts: Business funding from alternative sources is not like a loan. It is more of a sale transaction where the provider purchases your invoices as assets. They charge you an amount for providing cash up front and wait to collect. This will not negatively impact your credit history.
- Limited assets: Small businesses like consulting agencies typically start off without too many assets. These rarely need real estate or equipment and lack assets which you can borrow against. Banks are not likely to give loans without collateral. This is why you should turn to an alternative funding group.
Alternative financing may be a godsend for some businesses but there are downsides to it. You must research well to choose an alternative financing company, making sure there are no hidden fees.