The financing available to businesses is changing. Finding and obtaining credit in the current economic climate can seem like a nightmare. If you need help getting a bank loan or do not like your current options, alternatives to traditional secured finance are available.
What is Alternative Finance?
Alternative finance is financing a business other than traditional bank loans to raise capital. Many of these alternative sources are available online. If you have a history of loan denials, poor credit, or are unsure how much financing you need for your business, you could consider this option. However, understanding and navigating alternative financing options can be complicated. Read on for our top four alternative financing options to help you find the funding that best suits your needs.
4 of the Alternative Sources for Business Financing
The top 4 best business alternative funding sources include:
1. Crowdfunding
Crowdfunding is a process of raising capital for a project or business. It allows fundraisers to raise funds from many people through a platform online. Crowdfunding is most commonly used by start-ups and growing companies to access alternative funding. It is an innovative way to raise money for your new project, business, or idea.
A crowdfunding platform is a website that allows interaction between fundraisers and the crowd. Short-term business finance can be made and collected via crowdfunding platforms. If the fundraising campaign is successful, the fundraiser is typically charged a fee by the crowdfunding platform. In return, crowdfunding platforms provide secure and easy-to-use services.
It is important to note that every crowdfunding site is different. Some only allow time-limited fundraising, others meet goals to receive funding and some act as long-term community sites. Be sure to go through the fine print to understand if you get everything or nothing this way.
Advantages:
- Helps attract early investors.
- Test marketability and provide proof of concept
- Easy access for everyone.
2. Peer-to-peer lending
Peer-to-peer lending, also known as social lending, basically allows individuals to borrow and lend money to each other. Think of it as a mix of crowdfunding, loans, and angel investing. Traditionally, banks use existing assets to fund secured finance. Alternatively, loans made through P2P platforms bypass banks, and lenders fund loans with their own money.
Loan applicants and investors do P2P lending through the P2P platform. A P2P platform is typically a website or app that manages a relationship between two parties. Investors start depositing loan funds into the P2P lending platform. Loan applicants complete a financial profile that the site uses to determine their risk category, which calculates a reasonable interest rate. The P2P platform matches investors with potential borrowers using this financial profile. Investors can choose from applicant options. Applicants can review the offers and select one or more that meet their needs. The platform processes all the transactions.
Advantages:
- Higher interest rates than traditional loans.
- Less strict eligibility criteria for P2P lending
- Borrowing through P2P platforms also provides users with an efficient online experience.
3. Grants
A grant is business financing assistance provided by a federal, state or local government. It is a fixed amount awarded to applicants with a reasonable likelihood of success. Grants are much more competitive to obtain because they are money that is given rather than borrowed.
Federal grants go through three phases: Pre-Award, Award, and Post-Award. During the pre-allocation stage, the government announces the possibility of subsidies in subsidy packages. If the government receives a grant and chooses you to implement the proposed program at the award stage, the government will notify you. In the post-award phase, the non-profit organization implements the proposed program.
Advantages:
- Government grants usually provide large sums to grow an organization’s programs.
- Government subsidies stabilize programs and institutions. They are often multi-year reliable flows of money.
- Receiving government grants enhances the organization’s reputation and helps secure funding from other sources in the future.
4. Venture capital
A venture capitalist is an individual or company willing to put money into a start-up. They are usually looking for a return (requires an exit or growth plan) or an investment in your business. This type of funding is well suited to specific industries (tech, healthcare, online, and others) and usually requires some disruption to the company to adjust for growth. If this path seems like a good option, a solid business plan are essential here.
Venture capital firms typically raise most of their funding from large investment institutions such as pension funds and banks. These institutions invest in venture capital funds for up to 10 years. Investment institutions expect very high investment returns to compensate for long-term commitments and lack of security and liquidity. Therefore, venture capitalists provide short-term business finance to companies with high growth potential and those that can generate cash flow quickly.
Advantages:
- Help build your network.
- No security required
- Help grow your business
What are the benefits of alternative funding?
Alternative funding sources come with numerous benefits, which include:
1. More choices
Thanks to alternative funding, small businesses now have more options for secured finance. If your company has a poor or no credit history, getting a loan from a bank is very tough. Alternative lenders with lenient requirements have opened up many options.
2. Gives you quick access to finance
Alternative lenders often offer an easier and faster lending process than traditional lenders such as banks. There is also less bureaucracy when using alternative sources, making the process smoother and more efficient.
3. Provide specialized services for small and medium-sized enterprises
Alternative finance providers understand the wants and needs of small businesses looking to grow their existing businesses. They are experts in small business requirements. They are well-versed in the challenges facing small businesses and have expertise across a wide range of sectors, making it safer to raise the capital that is critical to the success of business growth projects.
Bottom Line
Alternative credit is growing in Australia as more entrepreneurs seek fast, efficient, and flexible access to business financing. If you need financing but dread going to the bank, this list of borrowing options offers a quick, flexible, and easy alternative. Every entrepreneur should have a list of choices. The less time you spend looking for financing options for your business, the more time and energy you can focus on what matters: your product, your team, and your company.