It used to be pretty straight forward to find a business loan for your business. All you had to do was call up your local bank and book an appointment, then wait a few weeks (or months) to talk with the bank manager. You’ll have to explain why your business needs the funds; and then hope to get catch the decision maker for your deal after their morning coffee.
It has become so much easier to get business funding in order to grow and expand since the inception of alternative finance. Nevertheless, one could say that it’s a whole lot more complicated.
We have created this editorial to explore the various different types of alternative funding sources out there. We want to help you decide whether it’s a feasible route for you, and how to prepare your business to acquire funds.
Banks vs. Alternative Lenders
Traditional Lenders have often been the main source of funding for startups, as well as small businesses for centuries. However, the needs of business owners as well as financial products have changed a lot since then.
Obviously, high street banks normally have a few different types of financial programs i.e. from bank overdrafts, commercial mortgages to business loans and invoice factoring and will recommend one or two depending on what type of business you run, your financial situation, and your growth plans.
During the 2008 recession, and subsequent austerity measures however, banks became very wary of lending to small businesses. Small businesses carry greater risk of defaulting on business loans, and with banks under the microscope, it became difficult for entrepreneurs to find success with their bank.
This situation brought about (or at least accelerated) the birth of Alternative Finance. The Alternative Finance space is very different to the banking sector, with lots of small providers specializing in innovative new types of finance;
Crowdfunding and Peer-to-Peer Funding
One of the most progressively popular for small business owners seeking business funding is the Peer-to-peer (P2P) lenders and Crowdfunding platforms. These funding sources circle around investing smaller amounts to businesses, through their “Crowdfunding” platform. There are a few different types of Crowdfunding available today and here are some of them:
Rewards-based Crowdfunding
Debt-based Crowdfunding
Equity-based Crowdfunding
Rewards-based crowdfunding
The two most well-known rewards-based Crowdfunding platforms are Kickstarter and Indiegogo. When using this type of crowdfunding source, you are required to set a goal, outline a number of “rewards” for different levels of investments, and launch a campaign for your funding needs. If you’ve heard of these platforms, then you’ll understand that they are in this category.
Debt-based crowdfunding
With debt-based crowdfunding, investors lend smaller amounts of money to multiple businesses, and these businesses repay them at a set by the crowdfunding platform, based on several factors.
Equity-based crowdfunding
This type of crowdfunding is absolutely comparable to the Rewards-based crowdfunding, except that in this case, investors typically take a piece of the business as equity, rather than just a “reward”.
Advantages & Disadvantages of Crowdfunding
One of the advantages of crowdfunding is that most of these crowdfunding platforms have an extensive network of investors always searching for new funding opportunities for small business owners. These investors want to diversify their portfolio and minimize their risk. On the bright side, it could be a very quick way to acquire funds for your business (that’s if you have a promising business).
However, the process of crowdfunding could to be much more rigorous than other alternative funding sources since crowdfunding platforms NEED to protect their investors as much as possible from being bombarded by unqualified business owners seeking funds.
Factoring
Factoring is a more appealing route to take for most small business owners, who struggle with late payments from clients. It is a much more effective way to release funds that are stuck in unpaid invoices, hereby, allowing you to get on with running your business, instead of chasing down clients for payment.
Factoring comes in two main forms;
Invoice Factoring
With invoice factoring, the business owner sends a copy of their invoice to your Invoice Factoring provider who advances them up to 90% of the value of the invoice.
They will then chase down the business owner’s customers for payment. For most providers, the customer doesn’t even need to know that the business owner uses an Invoice Factoring company.
Once the customer pays the provider, they release the remainder of the business owners’ invoice to them, subtracting any fees.
Invoice Discounting
Invoice discounting works in a similar way; however, the credit control element of the process remains with you.
Advantages & Disadvantages of Invoice Factoring
Indeed, invoice factoring can be a very effective way of releasing funds that are tied up in unpaid invoices and they are essentially a great option for businesses who need funding fast.
Another viable fact to consider is that most Invoice Factoring providers don’t require an asset to be provided as collateral in order to secure funds for the business owner. Invoice Factoring can only be provided on commercial invoices; however, most companies do NOT be able to benefit from it.
Invoice Factoring could also affect the profit margins of the business more than other sources of Alternative Funding sources. Generally speaking, Invoice Factoring is typically used in addition to other sources of funding. It could act as a back-up in case other lenders are unwilling to help.
Asset Financing
Asset Financing, like the two previous forms of alternative financing, comes in a few different varieties. Nevertheless, it is essentially a form of financing that is tied to the value of an asset, like a piece of machinery or a vehicle.
Installment Loans
An installment loan is a loan that is repaid over time with a set number of scheduled payments; normally at least two payments are made towards the loan.
Other uses of installment loans include home improvements, medical bills and higher education. Here are four common types of installment loans:
Mortgages
Auto loans
Personal loans
Student loans
Equipment Leasing
Instead of buying just any asset for your business, you can lease an Equipment and spread the cost of the equipment over a few years. You may never actually own the asset - you can only rent it for a fixed period.
These are beneficial due to service and maintenance costs, which are usually covered by the lender. Hereby, making an equipment upgrade quite easy for the business owner. Keep in mind that ownership of this asset is not inclusive. It’s typically an option for those seeking a piece of equipment for a short period of time.
Advantages & Disadvantages of Asset Financing
There are various benefits and setbacks to Asset Financing depending on which format you opt in for. It is great to note that Asset Financing allows you to secure your business cash-flow while you invest in tools and equipment that can help you grow your business.
This type of funding is usually secured against the asset, and not your home for example. This means that in the worst-case scenario of you defaulting on the loan, you’d lose the asset, rather than your home. However, you will end up paying significantly more for the asset than you would by paying upfront.
Business Loans
Business Loans are one of the simplest forms of funding available to small businesses, and there are a number of different alternative lenders, many of whom specialize in a particular type of Business Loan. We have access to those lenders.
Cash Flow Financing
Cash Flow Financing is a much more flexible form of traditional lending. This is where repayments are tied to your revenue and income. You usually pay more during busy periods and less during quieter months. Diamond Ethical can help you secure cash-flow or revenue-based financing for your business.
Fixed Repayments
Fixed-repayment loans are commonly known and could be a great option, knowing how much a business owner will be paying each month for the period of the loan. It enables the business owner to calculate effectively, even though, unlike the traditional lending institutions (like banks), many alternative lenders are now able to approve applications in a matter of days, sometimes hours depending on the type of loans being sought by the business owner.
Merchant Cash Advance
A Merchant Cash Advance is a type of short-term cash-flow funding solution that is provided to retailers who take a high percentage of their sales through merchant services. Nevertheless, it can work out to be very expensive if used longer term.
A percentage of the business owner’s future revenue is advanced as funds by the Lender, and the business owner’s repayments are made by deducting a percentage of future card sales.
Advantages & Disadvantages of Business Loans
For the most part, we already know that Business Loans are always a popular choice for small business owners as many alternative lenders offer flexible features with their funding programs to help small business owners grow (like some lenders won’t charge the borrower early repayment fees to motivate the business owners to apply).
There are also a few alternative lenders that charge interest on a reducing balance. This means that the more you pay off the borrowed funds, the less you pay in interest.
As always, the borrower’s eligibility for a Business Loan will be dependent on their personal credit history, collateral and/or cash flow. However, some alternative lending sources are more understanding of a borrower’s less-than-desirable credit score and can lend to smaller businesses than the banks can.
Preparing your business to raise finance
It is essential that you take the time to thoroughly understand the commitment you and your business are taking on when you take on any form of loan or funding for your business.
If you are uncertain of the ideal type of funding for your business you are seeking, it is always worth it to approach a credible local business association which could help. This is because they’ll know how to point you in the right direction, as far as local business funding groups that specialize in business finance in your area are concerned.
You can simply for funding on our web portals; www.diamondethical.com/apply. As we can connect you with the right lending institutions for your funding needs. You may prefer more hands-on help as speaking with our experienced commercial finance broker could be worth it.
We will be able to give you an in-depth explanation of the different types of funding available to you and handle your application with lenders, however you’ll be charged a fee for this service, which is typically paid at funding.
It’s always a good idea to prepare yourself accordingly, in advance, prior to submitting a funding application for your business and, we recommend that all applicants begin with supporting documents such as Profit & Loss statements, business bank statements for the last few months, Tax returns (for both personal and business) as these are some of the common documents that many lenders will ask for in order to see funding application.