Business Financing Options That Circumvent Local Banks.
Business Financing Options That Circumvent Local Banks.
Financing your own business maybe somewhat daunting, but a rewarding process. However, financing a startup or small business can be a difficult, drawn-out process, especially for those with poor credit. While there is no minimum credit score you must have to get a business loan, traditional lenders have a range they usually consider acceptable.
If you have a low credit score and no collateral to offer, consider an alternative loan. In this article, we break down 11 small business funding options, examine the benefits of alternative lending and provide tips on how to finance your business.
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Business Financing Options That Circumvent Local Banks.
Why is it difficult for small businesses to get loans from banks?
Capital is difficult for small businesses to access for several reasons. It’s not that banks are against lending to small businesses — they want to — but traditional financial institutions have an outdated, labor-intensive lending process and regulations that are unfavorable to local shops and small organizations.
The difficulty of accessing capital is exacerbated because many small businesses applying for loans are new, and banks typically want to see at least a five-year profile of a healthy business (for instance, five years of tax data) before extending an offer.
What is alternative financing?
Alternative financing is any method through which business owners can acquire capital without the assistance of traditional banks. Generally, if a funding option is based entirely online, it is an alternative financing method. By this definition, options such as crowdfunding, online loan providers and cryptocurrency qualify as alternative financing.
Why might small businesses seek alternative financing?
There are several reasons why small business owners might turn to business loan alternatives. Here are three of the most common.
- Lower credit requirements: Traditional banks are almost certain to decline loans to borrowers with credit scores below a certain threshold that, though different for each loan provider.
- Easier qualification: Not all small business owners meet the additional requirements to apply and be approved for traditional loans. In these cases, business loan alternatives are helpful.
- Faster approval: Traditional bank loans can take weeks to be approved, whereas some business loan alternatives give you access to funding in as little as one week.
Havelet Finance Limited is one stop for financing all loans. In fact, we say yes when your local bank decline your application.
Business financing options without a traditional bank
If your small business needs capital but doesn’t qualify for a traditional bank loan, certain alternative financing methods and lenders may meet your needs. Here are some of the top financing options for startups and small businesses.
1. Community development finance institutions
There are thousands of nonprofit community development finance institutions (CDFIs) across the country, all providing capital to small business and microbusiness owners on reasonable terms, according to Jennifer Sporzynski, senior vice president for business and workforce development at Coastal Enterprises Inc. (CEI).
“A wide variety of applications for loans come across our desk every week, many of them from ambitious startups,” Sporzynski said. “As a mission-oriented non-bank lender, we know from experience that many viable small businesses struggle to access the capital they need to get started, thrive and grow.”
Venture capitalists
Venture capitalists (VCs) are an outside group that takes part ownership of the company in exchange for capital. The percentages of ownership to capital are negotiable and usually based on a company’s valuation.
“This is a good choice for startups who don’t have physical collateral to serve as a lien to loan against for a bank,” said Sandra Serkes, CEO of Valora Technologies. “But it is only a fit when there is a demonstrated high growth potential and a competitive edge of some kind, like a patent or captive customer.”
Partner financing
With strategic partner financing, another player in your industry funds the growth in exchange for special access to your product, staff, distribution rights, ultimate sale or some combination of those items.
Partner financing is a good alternative because the company you partner with is usually going to be a large business and may even be in a similar industry, or an industry with an interest in your business.
Angel investors
Many think that angel investors and venture capitalists are the same, but there is one glaring difference. While a VC is a company (usually large and established) that invests in your business by trading equity for capital, an angel investor is an individual who is more likely to invest in a startup or early-stage business that may not have the demonstrable growth a VC would want.
Finding an angel investor can also be good in a similar way to gaining funding from a VC, albeit on a more personal level.
“Not only will they provide the funds, [but] they will usually guide you and assist you along the way,” said Wilbert Wynnberg, an entrepreneur and speaker based in Singapore. “Remember, there is no point in borrowing money just to lose it later. These experienced businesspeople can save you tons of money in the long run.”
5. Invoice financing or factoring
With invoice financing, also known as factoring, a service provider fronts you the money on your outstanding accounts receivable, which you repay once customers settle their bills. This way, your business has the cash flow it needs to keep running while you wait for customers to pay their outstanding invoices.
“By closing the pay gap, companies can accept new projects more quickly,” Shinar said. “Our goal is to help business owners grow their businesses and hire new workers by ensuring steady cash flow.”
Crowdfunding
Crowdfunding on platforms such as Kick starter can give a financial boost to small businesses. These platforms allow businesses to pool small investments from several investors instead of seeking out a single investment source.
“As an entrepreneur, you don’t want to spend your investment options and increase the risk of investing in your business at such an early age, you can raise the necessary seed funds to get your startup through the development phase and ready to be pitched to investors.”
Grants
Businesses focused on science or research may receive grants from the government. The U.S. Small Business Administration (SBA) offers grants through the Small Business Innovation Research and Small Business Technology Transfer programs. Recipients of these grants must meet federal research and development goals and have a high potential for commercialization. Contact us at credit@havelet-finance.com to know how you can secure a grant for your business.
Peer-to-peer or marketplace lending
Peer-to-peer (P2P) lending is an option for raising capital that introduces borrowers to lenders through various websites. Lending Club and Prosper are two of the most notable P2P lending platforms in the U.S.
“In its simplest form, a borrower creates an account on a peer-to-peer website that keeps records, transfers funds and connects borrowers to lenders. A key difference is in borrower risk assessment.”
According to the SBA, P2P lending can be a solid financing alternative for small businesses, especially given the post-recession credit market. One drawback of this solution is that P2P lending is available to investors in certain states only.
This form of lending, made possible by the internet, is a hybrid of crowdfunding and marketplace lending. When platform lending first hit the market, it allowed people with little working capital to give loans to other people — peers. Years later, major corporations and banks began crowding out true P2P lenders with their increased activity. In countries with better-developed financial industries, the term “marketplace lending” is more commonly used.
Convertible debt
Convertible debt is when a business borrows money from an investor or investor group and the collective agreement is to convert the debt to equity in the future.
“Convertible debt can be a great way to finance both a startup and a small business, but you have to be comfortable with ceding some control of the business to an investor,” said Brian Cairns, CEO of ProStrategix Consulting. “These investors are guaranteed some set rate of return per year until a set date or an action occurs that triggers an option to convert.”
Cairns believes another benefit of convertible debt is that it doesn’t place a strain on cash flow while interest payments are accrued during the term of the bond. A drawback of this type of financing is that you relinquish some ownership or control of your business.
10. Merchant cash advances
A merchant cash advance is the opposite of a small business loan in terms of affordability and structure. While this is a quick way to obtain capital, cash advances should be a last resort because of their high expense. Many of the top merchant services offer this option, so check with your provider to see if this could be a form of capital to explore.
“A merchant cash advance is where a financial provider extends a lump-sum amount of financing and then buys the rights to a portion of your credit and debit card sales,” said Priyanka Prakash, lending and credit expert at Fundera. “Every time the merchant processes a credit or debit card sale, the provider takes a small cut of the sale until the advance is paid back.”
Cash advances can be very expensive and troublesome to your company’s cash flow. If you can’t qualify for a small business loan or any of the options above, only then should you consider this option.
Convertible debt
Convertible debt is when a business borrows money from an investor or investor group and the collective agreement is to convert the debt to equity in the future.
“Convertible debt can be a great way to finance both a startup and a small business, but you have to be comfortable with ceding some control of the business to an investor,” said Brian Cairns, CEO of ProStrategix Consulting. “These investors are guaranteed some set rate of return per year until a set date or an action occurs that triggers an option to convert.”
Cairns believes another benefit of convertible debt is that it doesn’t place a strain on cash flow while interest payments are accrued during the term of the bond. A drawback of this type of financing is that you relinquish some ownership or control of your business.
10. Merchant cash advances
A merchant cash advance is the opposite of a small business loan in terms of affordability and structure. While this is a quick way to obtain capital, cash advances should be a last resort because of their high expense. Many of the top merchant services offer this option, so check with your provider to see if this could be a form of capital to explore.
“A merchant cash advance is where a financial provider extends a lump-sum amount of financing and then buys the rights to a portion of your credit and debit card sales,” said Priyanka Prakash, lending and credit expert at Fundera. “Every time the merchant processes a credit or debit card sale, the provider takes a small cut of the sale until the advance is paid back.”
Prakash says that while this appears to be convenient, cash advances can be very expensive and troublesome to your company’s cash flow. If you can’t qualify for a small business loan or any of the options above, only then should you consider this option.
Make Havelet Finance Limited your alternative lender when your traditional bank decline your application. To get started, contact us below;
credit@havelet-finance.com
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