When a small business owner is looking to expand their business, or to invest in technology for the purpose of increasing their competitive edge, they will usually attempt to secure funding for the expansion by applying for a small business loan. While most small business owners will normally take the traditional route of applying for a loan at a bank; more and more businesses are seeking alternative funding methods to traditional bank loans.
One of the reasons that business owners are seeking alternatives to traditional financing is that the financial crash in the previous decade led to stricter loan requirements, meaning that many business owners may not qualify for the loans, or traditional loans may not be affordable. According to a recent article in Forbes, prior to seeking funding, a business owner should conduct a detailed analysis of their finances. They should be aware of their profit margins, and they should be aware of how much capital they will need to take their business to the next level. This will make them more aware of what to expect in their search for the best funding options.
Following are the top five funding alternatives for small businesses.
- Family and Friends
“In addition to funding some or all of the costs to expand themselves, small business owners can also turn to family and friends to help finance the growth of their business,” according to Secure Investment Group. In many cases, a small business owner can actually fund their growth without accruing debt, which is always a plus. The fact that future profitability is never a certainty in business, and when a business can improve its position through funding that will not count against its bottom line, it allows them to move ahead of the curve.
- Equity Investors
Equity investors, or venture capitalists are great for small business owners who have high-growth businesses, but lack the collateral necessary to secure more traditional funding. An equity lender will bypass traditional lending in lieu of acquiring equity in the business. While the business owner will not be acquiring new debt, they will be giving up a portion of their company. Generally, what this will result in is having weekly conference calls with the investor in order to answer detailed questions about business decisions and the company’s performance.
- Online Alternative Lenders
Another alternative funding source that is growing in popularity is online alternative lenders. According to a report issued by the Federal Reserve Bank of New York, over the last two years, nearly one in five small businesses applied for loans from online lenders. When a business does not have a history that is extensive enough to provide a lucid portrait of performance and longevity, it can be very difficult to secure funding from the more traditional mediums. With online lenders, the requirements for the loan are often less stringent; however, the rates are generally higher than conventional loans.
- Angel Investors
Angel investors are similar to equity lenders in that they rarely require collateral as a pre-requisite for offering funding. An angel investor is actually an individual, business or organization that is committed to funding multitudinous small businesses. Like equity lenders, or venture capitalists, angel investors are actually investing in the business; therefore, they will want an equity share in the company. The difference between venture capitalists and angel investors is that angel investors are generally more patient with the entrepreneurs they choose to work with. They rarely expect immediate returns on their investment — meaning that there is some flexibility available for the business owner to work out a short-term finance plan.
- Asset-based Financing
With small businesses that are more established, asset-based financing may be an effective method to access capital to fund growth. Asset-based financing is funding that is secured via a business’ inventory, receivables, equipment, inventory or real estate. These assets work well with this type of funding because they can be quickly liquidated.
One of the primary benefits of asset-based financing is that the business owner will not have to surrender a part of their company to secure the funding. It is also possible for companies that are experiencing rapid growth to benefit from increased sales.
Additionally, it would be in the best interest of small businesses to use financial management software to help manage how the capital is used and the most efficacious way to manage the payments that are due. Some lenders will increase rates for as little as one late payment.
