What are some alternative business funding options you can explore?
Have you noticed that business funding has changed drastically over the years?
Banks used to be the default lending choice in funding and borrowing by most businesses. But thanks to factors including access to technology, a shift in a business mindset and the need for immediate cash flow, alternative business funding companies are taking up a share of the funding sector.
Many entrepreneurs have this question on their mind:
How do I know what kind of alternative business funding is right for my business?
In this quick guide, we help you understand different alternative funding options so you can choose one that fits your business needs.
The $5 trillion funding gap!
When a borrower obtains a loan from a lender that is not a bank, it’s considered a form of alternative funding.
Non-bank or non-traditional lenders offer many different types of loans that give borrowers access to capital when they need it the most. Often, small businesses and medium-sized companies apply for funding through alternative lenders when they are short on cash and need to inject capital into their business immediately.
A recent study by Oracle shows that alternative forms of funding are only expected to increase in popularity, as 40% of consumers feel that non-banks can offer more than a traditional bank. Small to medium businesses, in particular, are encountering a funding gap — $5 trillion to be exact — that is driving them to explore alternative borrowing options.
Another survey discovered that banks have an approval rate of approximately 58% from small business applications. In contrast, alternative lenders have a 71% approval rate for small businesses, which is making substitute funding options so viable and popular.
Popular alternative business funding options in 2021
Alternative loans come in many different forms, so you can usually find one suitable for your current needs. Here are three popular alternative funding options to add to your toolkit:
Asset-based lending (ABL)
ABL works by utilizing the assets your business already has, such as accounts receivable, inventory, machinery or equipment as collateral for a loan.
In terms of benefits, ABL loans can have lower interest rates and less stringent borrowing conditions as compared to other funding options.
Invoice factoring is when a business sells its outstanding accounts receivable to a third party at a slight discount.
A major advantage of invoice factoring is that businesses are not adding any more debt to their books. They’re simply getting access to their own cash flow before the invoice due date.
Peer-to-peer lending (P2P)
P2P is another alt lending solution that’s becoming more mainstream. Under this form of funding a borrower, an investor, and a partner bank are brought together through an online platform.
The main benefit of P2P is that borrowers enjoy a relatively lower interest rate. Because P2P platforms don’t actually give out a loan and act as a middleman, they are able to keep costs low.
Nevertheless, P2P lending does come with its own set of challenges. The main downside is there are no laws protecting borrowers or lenders. The platforms are generally not guided by any regulatory bodies, so there are a lot of inconsistent behaviors that may pose problems.
However, when you have a trusted go-to lending partner and have developed a long-term relationship with them, you’ll be able to openly discuss all funding options available — regardless whether they offer those options or not. This is our approach at Liquid Capital, and we’ll give you expert advice on a variety of funding options to help grow your business.
In light of uncertainty: Why alternative funding makes sense
Many small businesses have been locked out of government-assisted loan programs through their banks—and with temporary holds on new loans, businesses have no choice but to turn elsewhere for funding. As businesses struggle to come up with ways to fund their operations, alternative lenders seem like the obvious choice for many.
To put the need into context, Statistica predicts that 1,778 thousand small and medium businesses will receive loans this year from alternative lenders—amounting to $30,413M, which will set off an upward growth trend of 10.2% YoY.
Yet, perhaps many companies are also shifting towards non-traditional funding because they need to build partnerships with new lenders. Business owners recognize they aren’t experts in everything and no longer want to go at it alone. Instead, they are leveraging help from professionals who have the right experience, knowledge and resources to get things done.
Ultimately, you have to choose a funding option that fits your business needs and timing. Alternative lenders offer the flexibility of repayment and a creative solution to unique business challenges. They may also offer faster access to capital, so if you’re short on time you may want to speak with a non-traditional lender. Whatever your decision may be, choose an alternative lending option that makes sense for your unique business challenge.
When working with Liquid Capital, clients not only receive funding but also gain access to a strategic business partner who works alongside them to make sure their business is thriving. Liquid Capital Principals work closely with clients and help them address concerns regarding business operations outside of funding.
If you’re interested in learning more about us or connect with a Principal near you to chat about your business funding needs, click here.