Traditional financing institutions have often been complicated and hard to deal with, especially for small business owners. Small business owners mostly end up frustrated while trying to access any form of financing, whether it’s startup capital, refinancing, expansion, or fulfill operational needs.
Alternative business financing gives business owners accessible loans. Alternative loans generally refer to financing from alternative lenders, commonly referred to as “non-bank” or “online” lenders, like Nav. However, alternative business financing is so much more than this definition.
Simply put, alternative business financing is any means of obtaining business financing other than the traditional methods. Alternative business financing comes in different forms and shapes. This article provides an outlook on the different kinds of alternative business financing options in 2020.
1. Business Lines of Credit
Any business owner should get business lines of credit regardless of whether they need the cash immediately. They are also a great go-to option for cash flow emergencies. It could save you money in the end, compared to other fast cash forms that end up being expensive.
Business lines of credit are like credit cards. The lender extends you a certain amount of credit, and you only withdraw the amount you need. You can get the cash at any time, only up to the borrowing limit.
You only pay back what you use. Hence, the interest is calculated based on the average outstanding daily balance. Interest rates can range from 7% to 25% depending on the capacity of the business, whether it’s established and its credit score. Unestablished businesses and those with poor credit scores may require to have collateral.
Unlike credit cards, you are able to access the cash. Also, note that the proper use of business lines of credit is a great way to improve your credit score.
Most traditional lenders and banks don’t offer business lines of credit. However, modern alternative business financing institutions have made it easier to apply for business lines of credit online.
2. Term Loans
Term loans have been around for quite some time and could be what you are thinking of when you are looking for business financing. With a term loan, the lender gives you an assured amount of money that you pay back, with interest, over a particular period.
Of all forms of alternative business financing options, term loans are the most similar to bank loans. What sets them apart from bank loans is that the term loans are given by online lenders.
Term loans are also referred to as mid-term loans. They are usually paid off in two to five years with monthly payments.
Term loans may be the more affordable option among alternative business financing options, but are more expensive than bank loans. The benefits are that they are faster to access and have quicker application processes. On the downside, they can be quite difficult to qualify for, and not many lenders offer this option.
Also Read: Four Ways of Funding Your Business Idea
3. Equipment Financing
Equipment loans are a great option, if you are looking for financing to purchase new equipment for your business.
A lender may finance up to 100% of the total cost of the equipment you want to purchase. Unlike other forms of financing, you don’t require collateral. Instead, the equipment then serves as the collateral. The repayment terms are similar to those of a normal loan.
Like any other form of loans for tangible items, such as a car, you have to keep making repayments until the loan is fully settled. The equipment then becomes yours fully after you’ve repaid in full. Interest rates range from 8% to 30%, so make sure you check which lender offers the most suitable rates. Remember that the larger the loan, the more time you spend repaying.
The benefit of this type of alternative business financing is that you can qualify for cheaper financing by using the equipment as collateral. However, one drawback is that the financing can take longer to receive as the lender has to audit the purchase. Also, the equipment may be better off leasing if it depreciates.
Also Read: How to build business credit in 30 days?
Crowdfunding is a great alternative financing option if you are well-connected and have a network of eager fans and customers. This method allows you to get financing for your business from different investors, businesses, or individuals. Various online platforms allow you to start crowdfunding easily.
Crowdfunding works better when shared on social media with a clear marketing platform and a brilliant call-to-action. However, crowdfunding can be a nerve-wracking process. It requires a lot of effort to create, monitor, and successfully market and run the entire campaign.
You can consider it if your business doesn’t qualify for other types of funding. This alternative means of financing has worked successfully for some brands and startups.
This is also a remarkable way to supplement or build on other forms of financing.
Alternative business financing options are great for small business owners who can’t access conventional loans. They come in different types of loans offered by alternative loan lenders. They include business lines of credit, equipment financing, and term loans. You can also choose to crowdfund if you have a strong network of customers and investors.