If you’re a small business searching for funding, there are dozens of options to consider. Between a merchant cash advance, business line of credit, or equity financing – it can be easy to get overwhelmed. In this guide, we’ll explore some of the best small business loan alternatives so you can secure the financing you need to grow your business.
Revenue-based financing, such as a merchant cash advance, can be a terrific option for businesses that lack the credit rating or collateral required for most traditional business loans. They offer more flexible terms that can be advantageous for your business’s cash flow.
Revenue-based financing works by using your business’s revenue as a form of collateral to back the financing, enabling you to secure funding even if you have a less-than-perfect credit score or lack collateral that’s required for most traditional loans. As your business makes money, you’ll pay a portion of your revenue towards your financing until it’s been paid in full. For this reason, there is no set interest rate. You can use a revenue-based financing calculator to better estimate the APY on your financing.
However, because of this flexibility, the cost of your financing can be more expensive than other options. There are a multitude of factors that will determine how much you pay but in many cases, your financing can exceed 20% annually.
If your business doesn’t have the credit or collateral to secure financing, revenue-based financing is worth exploring. They offer flexible payments that are based on your business’s revenue so you aren’t stuck with large monthly installments and some funders offer prepayment that can reduce the cost of your financing further.
A business line of credit is another alternative lending option available to small businesses. This form of financing requires that you have a reasonable credit score and a business history of at least six months if not more. The exact requirements can vary from funder to funder, so be sure to check with your funder beforehand.
A business line of credit works by offering you a total amount of capital available to draw from on an as-needed basis. As you make payments, your available capital is replenished and the amount available to draw from increases.
Business lines of credit can be either secured or unsecured. Secured lines of credit have assets that are supplied as collateral if you’re unable to make your payments. Unsecured lines of credit do not require collateral. Because of the increased risk that unsecured lines of credit carry, they come with higher interest rates and less favorable terms compared to secured options.
If your small business is looking for alternative financing, business lines of credit can be a worthwhile option that offers greater flexibility with larger financing amounts compared to other financing options. Additionally, because they are more dependent on your business’s credit, funding times can be as short as hours in some cases.
Opening a business credit card can be a simple and quick way to get instant financing when you need it. The application and approval process can take less than five minutes, giving you fast access to funding the moment you need it.
While the interest rates can be lofty on business credit cards, it’s one of the easiest methods to get financing in a hurry.
Just like a business line of credit, business credit cards offer more flexibility with how you use your funds and how interest is paid. Instead of paying interest on a large lump sum amount, you’ll only pay interest on the amount charged to your card – which can reduce your costs. Depending on how you use your card, you may pay no interest at all making it a smart choice for very short-term cash flow obstacles.
Finally, with a business credit card, you can earn lucrative rewards on your spending and gain access to special benefits that can be valuable to many small business owners.
If you need financing specifically for equipment, equipment financing is a great small business loan alternative.
This form of financing uses the equipment as collateral, which allows you to secure financing without needing additional assets to back your financing. Most funders will finance between 70% and 100% of your purchase, so you may need some capital upfront as a down payment. Interest rates are determined by current market conditions and your personal and business credit scores but typically hover between 7% and 20%.
If your small business is looking to purchase equipment, equipment financing is a straightforward way to secure the financing you need to grow your business. While the interest rates can be higher and you don’t get the same flexibility to use your funds as other options, the approval process can be extremely fast and you can secure funding within the week.
If your small business has outstanding invoices that haven’t been paid, invoice factoring can be a great alternative to small business loans to secure capital quickly.
Invoice factoring works by selling the rights to your outstanding invoices to a factoring company in exchange for capital minus a fee, known as the factoring fee.
There are several types of factoring including recourse, non-recourse, and partial-recourse factoring. With recourse factoring, you grant the factoring company rights to unpaid invoices and if invoices as paid past the due date, your business is liable. With non-recourse factoring, the factoring company assumes the risk of unpaid invoices and therefore charges higher premiums for your financing. Partial-recourse factoring combines both into a hybrid model that can offer benefits to both the factoring company and your business.
With invoice financing, instead of having the factoring company collect payments from outstanding invoices, you are responsible for the collections process. Invoice financing is more similar to equipment financing or a line of credit, where your invoices are used as a form of collateral to secure a large lump sum of financing that you are responsible for paying back.
Depending on your business goals, equity financing could be a viable option to raise money and secure the funds you need to grow your business. This type of financing is much different than the other forms because instead of having to repay a funder, you’re giving up equity in your business in exchange for the financing you need to operate it.
Equity financing can be a superior option for larger businesses that require massive amounts of financing to grow. Many tech firms and high-growth companies will opt for equity financing because of the lack of requirements. There are no strict guidelines other than a vision for growth and profitability to obtain this type of funding.
Some small businesses might consider crowdfunding to find the capital they need to grow their business. This form of financing involves raising small amounts of money from a large number of people in exchange for products or other services.
The process of crowdfunding can be cumbersome and overwhelming but it can be one of the least expensive ways to secure financing if you’re able to do it successfully.
This form of alternative financing is often best for businesses that offer physical products that can be pre-sold for validation of their business model.
Peer-to-peer lending is most similar to a loan, except instead of relying on a standard financial institution, you’ll be borrowing money from individual investors directly. The main benefit of using peer-to-peer lending is the more lenient approval process. While you’ll still be required to meet certain minimums, there’s more flexibility in the approval process that opens the door to small businesses that may otherwise not be eligible.
Overall, peer-to-peer lending can be a simple option similar to traditional bank loans but with a more flexible and lenient approval process. Your interest rate will vary depending on current market conditions, your credit rating, and the funder you work with – but in many cases, it can be higher than a traditional funder.
When it comes to small business loan alternatives, there are plenty of options worth considering. Ultimately, the choice comes down to your unique business circumstances and needs. To find the best rates and terms, it’s worth exploring all of your options and weighing the pros and cons of each as the terms can vary from funder to funder.
If your business is seeking funding to expand to a new location and has significant revenue, revenue-based financing such as a merchant cash advance could be your best option.
If you need a flexible amount of funding and have reasonable credit, exploring a business line of credit or business credit card can be great loan alternatives.
If your business has outstanding invoices, invoice factoring or financing can be an easy small business funding option.
Finally, if you don’t mind giving up equity in your business or you need a significant amount of capital – equity financing could be the best choice for your business.
If you need help finding the best alternative business financing solution for your company, get in touch with Specialty Capital today to explore our offerings!
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