Despite the exponential growth of funding sources in recent years, securing a loan for your company still remains an arduous task, and one that is more than likely to end up being turned down. However, if you are hellbent on financing the future growth of your company, there are quite a few other options that can be considered, offering a higher probability of approvals, compared to mainstream sources.
Lending to businesses without a strong track record, or any collateral poses significant risks to banks, lenders, and financial institutions. As a result, small business owners are often starved of much-needed capital at critical junctures of their ventures and operations.
In this article, we will dive deep into the alternative funding sources for companies, if they’ve experienced failure with legacy institutions.
1. Seek Alternative Lenders
If traditional sources turn their back on you and your company, there is a wide range of new, and innovative alternatives that can still be considered. Apart from the smaller banks, credit cooperatives, and private lenders, who are willing to consider risky bets in return for higher rates, there are even peer-to-peer lending platforms, which are getting increasingly prominent in recent years.
P2P lending essentially involves borrowing money from a number of individual lenders, often using an online platform or marketplace. The rates are often higher, and terms shorter, but approvals are fairly quick and hassle-free, given that the risk in such types of lending gets distributed among a large number of investors, making it a win-win for both borrowers and lenders alike.
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2. Merchant Cash Advances
Another innovative new source of capital for small businesses includes merchant cash advances (MCAs). Under this, businesses receive a lump sum in cash upfront, similar to a term loan, following which the lender is entitled to an agreed-upon percentage of the total credit card and debit card payments generated by the company.
MCAs are largely unregulated, and the overall rates of interest often extend far past that of mainstream banks and financial institutions, but the entire process is hassle-free, and companies can expect quick approvals, without putting up any collateral, or showcasing a long track record. For small businesses that are starved of cash, this represents a great option to secure financing and get things running right away.
3. Invoice Factoring & Financing
This is far from a new concept and has been around for as long as trade and commerce, starting with Mesopotamia 5,000 years ago. For businesses that are in need of working capital, factoring is essentially the process of selling invoices or receivables to a factoring company, for 85% to 90% of the total invoice amount, following which the factoring company collects payments on the first party’s behalf.
Invoice financing is similar, but not the same, since here invoices, or receivables are used as collateral to borrow money from lenders. The financier here does not buy your invoices, nor do they collect payments on your behalf, but are merely sources of short-term credit to help companies enhance their liquidity profiles and fund purchase orders, without taking out expensive, and time-consuming loans.
4. Try Personal Loans Available For People With Poor Credit
A personal loan is the most widely used source of funding for small business owners, and while they are far from ideal, in that they pierce the limited liability of corporations and affect a promoter’s personal finances, they are far easier to get than unsecured business loans. However, here again, the borrower’s credit history, scores, assets, and outstanding liabilities are taken into account before approval.
In fact, one of the biggest reasons behind the rejection of business loans is the poor credit scores of the promoters. If you have poor credit, however, there are still a number of options for personal loans, albeit with higher rates and tougher terms. Quick loans for poor credit consumers have turned into a niche in and of itself, with billions of dollars advanced each year, for a wide variety of use cases.
5. Equipment Leasing
If your borrowing requirements were aimed at purchasing new plants and equipment, consider equipment financing as a viable alternative. This concept works exactly as it sounds, that is, instead of buying equipment outright, you are leasing it from manufacturers, or asset owners. There are currently a number of finance companies that offer equipment leasing services.
This was popularized by the aviation industry, and now remains a staple across most sectors that rely on sophisticated heavy equipment that can eat into a company’s cash reserves when purchased outright.
An equipment leasing model further offers enhanced risk metrics for businesses, with warranties and insurance built into the program, along with the lack of depreciation resulting in substantial savings.
With intensifying competition in the finance industry and innovative new service models, facing loan rejections is no longer a death sentence for entrepreneurial aspirations.
There are a wide variety of offers, products, and services that come with certain trade-offs, but stand to add substantial value to businesses nonetheless.