Sometimes traditional lending options like bank loans and lines of credit just don’t cut it for small businesses. Alternative lenders can provide nontraditional cash sources for those who don’t qualify for traditional financing, are debt averse, or simply seek to boost working capital. We’ll explore a few ways to get financing, plus sources of cash that you don’t have to pay back on this page.
Differences Between Traditional and Alternative Business Financing
Traditional bank loans and alternative lending options offer distinct advantages and challenges for small business owners. Traditional business financing usually involves lengthy application processes, stringent credit checks, and collateral requirements. While this form of financing often comes with lower interest rates, it may not be accessible to businesses or startups with limited credit histories or those seeking short-term financing.
In contrast, alternative lending for small businesses provides a more flexible range of financing options. These alternative financing methods include merchant cash advances, business lines of credit, and cash advances. They are generally easier to access and have faster approval times. However, alternative lenders typically charge higher interest rates and fees, making them a more expensive option. Exploring alternative financing can be particularly beneficial for small businesses to get the necessary funds without extensive paperwork or delays.
Understanding the differences between traditional and alternative business financing allows business owners to choose the financing methods that best suit their needs. While traditional banks may offer stability and lower rates, alternative lenders offer a range of flexible options beyond traditional solutions. By considering both types of financing, business owners can find the best small business loans tailored to their unique situations.
For small business owners exploring small business financing options, it’s essential to consider nontraditional methods alongside more conventional solutions. While traditional bank loans and lines of credit may work for some, alternative options like angel investors, venture capital, and invoice factoring offer a more flexible approach for businesses with unique funding needs. By evaluating a variety of financing methods, business owners can select the best option to sustain growth and improve cash flow without sacrificing control or facing long approval times.
1. Angel Investors
Angel investors are people who put their own money into a business. Sometimes the angel investor is a friend or family member of the business owner, though unrelated individuals will sometimes invest too, especially with early-stage startups. The investors seen on Shark Tank are an example of this.
The average angel deal is just under $400,000, according to the UNH Center for Venture Research. Because angels aren’t chained by traditional lending terms, and deals are largely based on the angel’s personal belief that the business will succeed, some businesses will have an easier time qualifying for funding this way. However, it’s difficult to find angel investors, and most will expect a 20 to 30 percent equity stake in the company in exchange for their funding.
When Angel Investors Work Best
Angel investors work best for early-stage startups that don’t mind giving up some control of the company in exchange for cash.
Pros and Cons of Angel Investors for Small Businesses
Angel investors offer a unique alternative financing solution for small businesses seeking capital without the constraints of traditional bank loans. One of the key benefits of this type of financing is the access to capital without the need for immediate repayment or high interest rates. Angel investors often provide mentorship and industry connections, which can be invaluable for new businesses or startups looking to navigate the market. However, a major drawback is the potential loss of control, as angel investors typically expect an equity stake in the company. This can impact decision-making and future business direction.
For small business owners, exploring alternative financing options like angel investors can be a good option when traditional financing options are not viable. This form of alternative financing allows businesses to secure funding without the rigid requirements of a traditional bank. However, it’s essential to weigh the pros and cons of alternative options and understand the expectations involved. While angel investors can help small businesses grow, they can also introduce new challenges. Understanding these dynamics can help small business owners make informed decisions and find the best alternative lending options for their specific business needs.
2. Venture Capital
Venture capital, also referred to as VC, is similar to angel investing, though it involves multiple investors pooling their money. The mindset of the investor is a little different, too, as most will want a quick and profitable exit. There’s also generally an expectation that investors or some of the investment team will be taking board seats to ensure the company is profitable. However, you may find some options, like Viva’s Venture funding, that don’t have this requirement.
Venture capitalists tend to gravitate to certain industries. Software is the biggest for VC, followed by pharma and biotech, per Statista. The median deal size varies based on the stage of business growth. Seed investments are just below $2 million, while early VC sits at $6 million, and later VC is at $11.5 million, according to Statista.
When Venture Capital Works Best
VC is a form of nontraditional financing often leveraged by startups poised for rapid growth and in need of large amounts of capital but is deemed too risky by traditional lenders.
3. Crowdfunding
Crowdfunding allows businesses to raise capital from their customers, supporters, or fans. Rewards-based crowdfunding is one of the most common options. This is usually done through specialty online platforms and promoted via social media. While a business’s plan and viability must generally be published for would-be backers to review, most backers pledge money because they want to see an idea succeed and receive some type of reward. For example, early backers who give $50 toward a campaign may receive the product free when it releases, while those who give $75 may get the product and brand merch, such as a t-shirt.
Each crowdfunding platform is different and has its own rules. For example, some won’t release funding to the business unless it reaches its goal. In addition, there may be restrictions on amounts people can pledge, overall goals, products, and rewards, too.
When Crowdfunding Works Best
Traditional crowdfunding, such as through a platform like Kickstarter, works best when a business has a tangible good to offer backers and is able to invest in marketing to ensure the campaign is a success. However, there are other options too. For example, Patreon helps creators build communities and get funded.
4. Peer-to-Peer Lending
Peer-to-peer lending is a form of crowdfunding, but backers don’t usually receive goods in exchange for their investment. Instead, it works more like a traditional loan in which the backers expect full repayment and interest.
Equity crowdfunding, profit-sharing crowdfunding, and debt-securities crowdfunding are related alternative cash sources. Instead of being repaid with interest, the backers receive equity in the company, a share of future profit, or a debt instrument like a bond.
As with traditional crowdfunding, peer-to-peer lending is typically handled through a specialized platform, and each has its own rules. However, because it typically functions like a traditional loan, hopeful borrowers should have good credit scores, strong finances, and meet other requirements that banks usually have.
When Peer-to-Peer Lending Works Best
Peer-to-peer lending is an unconventional loan that’s usually best for businesses in an industry that’s underserved by traditional lenders, but that would otherwise meet more stringent lending requirements.
5. Community Development Financial Institutions
A community development financial institution (CDFI) is a lender that receives money from the government’s CDFI Fund, a special program designed to spur growth in economically disadvantaged communities. By giving lenders access to cash with the expectation that they add to the pool and provide loans to businesses that might not otherwise have access to funds or don’t qualify for traditional funding.
CDFI loans sometimes come with perks such as mentoring and advisory services that can help business owners build stronger, more sustainable companies. Rates and terms are comparable to bank loans, though they typically have fewer fees and are often structured to make repayment easier.
When a CDFI Works Best
Only businesses that lack resources, opportunities, or access to financial services can qualify for funding through a CDFI. Because the approval process can take some time, this unconventional financing option is best for businesses that can wait a couple of months for cash.
6. Microlending
Microloans are short-term loans with a low interest rate capped at $50,000 or less. They’re often used as business loans for startups, the self-employed, and businesses that only have a few employees. Businesses will need to meet standard lending criteria, such as having good credit and a strong business plan. There are also stipulations on how money from the SBA microloan program may be spent. For example, the loan cannot be used to pay existing debts or to purchase real estate. However, businesses can use the cash to expand, rebuild, reopen, or improve.
When Microlending Works Best
The average microloan is around $13,000 per the SBA, so this funding option is best for businesses with a good credit history that don’t need a lot of cash and want to invest in growth.
7. Invoice Financing (Factoring)
Invoice factoring is used by B2B businesses that invoice their clients after goods or services are delivered. Instead of waiting for net 30 payment terms or longer for the client to pay, the business submits the accounts receivable to a factoring company, which then advances most of the invoice’s value to the business immediately. Some factoring companies, such as Viva, provide same-day funding. When the client pays the factoring company, the factoring company then sends the business the remaining value of the invoice, minus a nominal factoring fee. There’s typically nothing for the business to pay back because the advance is paid off when the client pays their invoice.
When Invoice Factoring Works Best
Factoring works well for businesses that require fast and flexible funding. Sometimes businesses use it as an alternative funding option to finance growth initiatives when they’re debt-averse or face a wrinkle in their cash flow cycle. Others use it to bridge working capital gaps when they’re growing rapidly. Because the business’s client is the one ultimately responsible for paying the balance, factoring companies focus more on the financial health of the clients and can, therefore, fund businesses that don’t normally qualify for traditional funding options due to poor credit, lack of time in business, or other rigid requirements.
8. Renting Out Extra Space
Businesses exploring nontraditional cash sources may also want to consider renting out physical space. Salons often do this by renting out chairs. Sometimes businesses offer up co-working spaces, single desks, or conference rooms too.
To make it work, businesses must identify fair value for the space, vet candidates carefully, and create clear agreements about what’s allowed and what’s off-limits. Consider parking, access to equipment, supplies, and anything else your renter may be able to physically access while on the premises.
When Renting Out Extra Space Works Best
Renting out extra space works best when the business owner has space in a desirable location and/or access to helpful amenities. Because this approach usually involves creating a legally binding agreement between two parties, business owners should consult with an attorney as contracts are drawn up.
9. Affiliate Marketing
Affiliate marketing involves publishing special trackable links to another company’s products or services online. When a visitor takes a specific action, the affiliate gets a payment from the company selling the good or service. More often than not, the visitor must purchase after clicking the link in order for the affiliate to receive payment, though some programs pay by the lead, click, install, or other action instead.
Some affiliates are unattached to the product or service in question, though most are somehow related to or involved with the product or service. For example, an IT company may post an article that discusses computers, then have links to systems that match the description on Amazon. If the IT company has multiple clients using the same software, it may also begin actively promoting the brand as an affiliate.
When Affiliate Marketing Works Best
A business must have traffic in order to generate passive income through affiliate marketing. The most successful affiliate marketers constantly produce new content to increase organic traffic or run ads to bring in paid traffic. In addition, they usually use their expertise to encourage visitors to take action.
10. Referral Partnership Programs
Referral partnership programs are similar to affiliate programs in that both involve a third party sending a potential client to another company. However, as the name indicates, the referring business and the business providing the good or service have a collaborative relationship with a referral partnership.
Many people are familiar with the “refer a friend” type program. In these cases, it’s typically an existing customer referring a new customer. This is sometimes true with businesses, though sometimes the referring business has another tie to the business it’s sending prospective clients to.
Referral partners typically sign an agreement, are formally onboarded, and are equipped with marketing materials. This allows them to pitch the product or service more effectively to increase sales. In addition, prospects referred through these programs are more likely to sign up for services because the referral partner helps build the relationship in advance, so referral partners generally earn considerably more for each sale than affiliates do.
When Referral Partnership Programs Work Best
Referral partnership programs work best when the referring business connects with people who are a good fit for the product or service and don’t mind doing some legwork or relationship-building to encourage the referred client to move forward.
Overcome Cash Flow Issues and Get Debt-Free Funding with Viva
Want to accelerate cash flow through invoice factoring? As a leading factoring company with decades of experience, Viva can provide your business with fast, reliable, and flexible funding. To learn more or get started, request a complimentary rate quote.
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