Overcoming financial hurdles is a part of any business plan. For small businesses, this may be a rather challenging task. However, traditional financing is no longer the only option available. In recent years, alternative lending options for small business financing have gained popularity providing businesses with diversified sources. This blog will delve into the various lending options while highlighting their features and unique benefits.
Exploring alternative business credit options like crowdfunding, invoice financing, peer-to-peer lending, merchant cash advances, online business loan, microloans, crowdfunding for equity, government programs, and grants can help business owners support their entrepreneurial endeavors.
Here are the top 6 alternative lending options you can choose for your small business financing:
Crowdfunding: Harnessing the Power of the Crowd
Crowdfunding has helped businesses raise capital by leveraging the contributions of a crowd rather than an individual. To run a successful crowdfunding campaign, businesses must convince a group of investors that their project is worthy of investment. There are four types of crowdfunding: rewards, donations, debt, and equity.
Reward-based crowdfunding is a campaign where borrowers get rewards for investing. The rewards are usually products, services, or experiences the company offers at a discounted price.
This involves getting contributions from a group of people without offering a product or service in return to donators. It is an ideal form of crowdfunding for small businesses with a charitable purpose.
This is a form of peer-to-peer lending where a group of people gives money as a loan that should be repaid at a set date with interest.
Equity: This crowdfunding type allows small businesses to offer shares or equity stakes in exchange for funding.
Peer-to-Peer (P2P) Lending: Connecting Borrowers and Investors
Peer-to-peer lending is an alternative for small business financing that connects borrowers directly with their investors without the help of a financial institution as an intermediary. This type of lending is usually done through online lending platforms. Some key considerations of Peer-to-peer lending are:
Borrowing process: businesses can create loan listings that outline their financing needs and borrowing terms. Lenders will then review and decide whether to fund the loan.
Advantages and considerations: this type of lending offers fast approvals, competitive rates, and flexible repayment terms. However, borrowers should carefully consider fees and lenders’ reputations before deciding on the right lender.
Merchant Cash Advances: Borrowing Based on Future Sales
Merchant cash advances are an alternative financing option that provides businesses with a lump sum payment for a percentage of the company’s future or credit card sales. It is best for small businesses as it can be repaid only as more cash flows into the business with a small fee. Some important points to consider are:
Repayment structure: A flexible repayment method is solely based on the company’s revenue. Repayment is done through a percentage of daily credit card sales rather than on fixed monthly payments.
Considerations: The only downside is that merchant cash advances for small businesses have higher interest rates and fees than traditional loans. Therefore, businesses need to evaluate its impact on their cash flow and profitability.
Online Business Loans: Streamlining the Borrowing Process
Online business loans are another convenient way to get financial resources through non-banking lenders on digital platforms. Buddy Loan also offers lenders that can provide you with the funds you need at interest rates starting at 11.99%. Online business loans has two important features that streamline the borrowing process:
Application process and speed:
Online business loans have a streamlined application process and quick approval times. This makes them a great option for small businesses that urgently need funding.
Interest rate and terms:
These loans have comparative interest rates and terms that vary from one lender to another. Studying and comparing loan rates carefully before availing of it is important. This is to ensure they align with the business’s financial capabilities.
Microloans: Empowering Small Business Owners
Microloans for small businesses are small short-term loans offered by community organisations, non-profit lenders, or government programs. These loans are best suited for small businesses that need non-traditional small loans. Microloans have two important factors, these are:
Loan amount and purpose: Microloans are usually given to businesses looking for smaller loan amounts. They can be used for various purposes, such as working capital, purchasing equipment, or inventory.
Benefits: Microloans are usually given to businesses with no access to local financial institutions or poor credit scores, or if they require a loan amount smaller than what traditional banks can give.
Crowdfunding for Equity: Accessing Capital and Building a Network
Crowdfunding for equity involves getting capital by selling shares or ownership stakes of the business to investors. Equity crowdfunding’s main goal is to raise the necessary funds by having many investors make small contributions. Some benefits of crowdfunding for equity are:
Easy access to capital: Crowdfunding for equity allows companies to showcase their projects to many investors, which helps with capital raising.
Lucrative returns: Although risky, startups may provide very lucrative returns to investors.
Government Programs and Grants: Exploring Financial Assistance
Small businesses in India can explore government programs and grants as an alternative lending option. The Government offers support and encouragement for affordable small business finance to promote growth and development. The Government takes three significant initiatives for this purpose, these are:
Pradhan Mantri Mudra Yojana(PMMY):
This program provides loans up to Rs 10 lakhs to small businesses, micro-enterprises, and individuals for income-generating activities. There are three types of loans given by PMMY, Shishu, offering loans up to 50,000, Kishore, which offers loans up to 5 lakhs and Tarun, which offers loans up to 10 lakhs.
Credit Guarantee Fund Trust for Micro and Small Enterprises(CGTMSE):
It gives credit guarantees to financial institutions to encourage collateral-free loans to micro and small businesses.
Ministry of Micro, Small, and Medium Enterprises(MSME):
This ministry provides various small business grants and funding programs. Some of the schemes they provided are Credit Linked Capital Subsidy Scheme, the National Small Industries Corporation(NSIC) Subsidy Schemes, and Technology Upgradation Fund Scheme.
There is a plethora of lending options for small business financing that any business can explore. Through these alternative lending options, businesses can enjoy many unique features and benefits and diversify their financing strategies. It is essential to carefully evaluate the terms and conditions of the financing agencies so businesses can find solutions and goals that align with their needs.
FAQs for Small Business Financing
Q. What is crowdfunding, and how does it benefit small businesses?
A. Crowdfunding is a way to raise money for projects or businesses from many people through online platforms. Businesses can gain exposure and attract potential customers through crowdfunding.
Q. How does peer-to-peer (P2P) lending work, and what are the advantages for small businesses?
A. Peer-to-peer lending allows people to borrow or lend money from one another. A major advantage of peer-to-peer lending is it connects borrowers directly to their investors.
Q. What is invoice financing, and how can it help improve cash flow for my business?
A. This a form of alternative lending that allows businesses to borrow money against the invoice due from customers. Invoice payment provides businesses immediate access to funds that would otherwise be stuck in unpaid invoices.
Q. How do merchant cash advances work, and what factors should I consider before pursuing this option?
A. Merchant cash advances provide businesses with money in exchange for a portion of credit card sales. It would be best to consider the high cost of borrowing and the potential impact on cash flow due to daily repayments before taking up this option.
Q. What are the advantages of obtaining an online business loan, and what should I watch out for?
A. The advantages include a streamlined application process and faster funding. However, you need to watch out for high-interest rates, hidden fees, and the credibility of online lenders.