5 Alternatives to Traditional Business Loans for Financing

Running a small business or startup in the current dynamic market environment is definitely a gargantuan challenge. It is estimated that more than 29% of businesses fail because they run out of capital. Most times, businesses find it hard to survive because they are unsuccessful in acquiring financing through traditional business loans. 

Here are a few alternative sources of financing that you can consider for your business: 

Peer-to-peer lending

Also known as P2P lending, it is one of the simplest ways to secure financing for your business. Verified borrowers can seek financing from potential investors looking for higher returns on their investments. In 2019, the P2P lending market was valued at $67.93 billion and is estimated to reach $553.91 billion by 2027. P2P lending is one of the few financing options where the lender can be a business or an individual, and more importantly, there is no financial intermediary to facilitate the transaction. It usually takes place through an online platform that matches potential borrowers with the right lenders. 

For borrowers, the biggest advantages of opting for P2P lending are:

• Lower interest rates: Owing to lower origination fees and competition between lenders, the interest rates associated with P2P lending are generally lower. 

• Higher accessibility: Compared to other traditional loans, P2P lending is a more accessible funding option, especially if the borrower has a lower credit rating or if the purpose of the loan is atypical. 

Venture Capital

Venture Capital is a type of private equity option wherein businesses can secure financing from investors. Investors looking for long-term returns provide funds to startups and small businesses, after assessing whether they have the potential to generate higher returns as a result of the financing. Investors are likely to consider businesses that show the highest potential for sustainable growth. In most cases, businesses provide a stake in the company to the investors in return for their investment to diminish the risk factor for the investor. 

Here are a few advantages that borrowers can get by choosing venture capital for financing: 

• Business Expertise: Generally, venture capitalists have a lot of business acumen that borrowers can leverage for their business success, especially if your investors are a group of people who have been doing for a long time. You gain a lot of insight and industry experience from them that you can utilize for your business growth.

• Connections: If you have an influential investor on your team, you also have the additional opportunity of tapping into their connections. Since your investor has a lot to gain from your success, you could get a lot of aid through their connections and business network. 

Crowdfunding

Like P2P lending, crowdfunding is a financing option that is enabled through online platforms and facilitated through individuals. Crowdfunding provides a way for businesses to get financing through multiple groups of people and individuals in smaller pockets of investment. Crowdfunding can be a great way to raise financing if you own an art or creative business, for which attaining traditional loans might be a bit more complicated. 

Here are a few advantages of crowdfunding that you can get as a borrower: 

• Creates Network Effect: When you are raising funds through crowdfunding portals, you have the benefit of reaching out to a larger network of individuals which would at the least, offer visibility and brand recognition for your business

• No collateral requirement: While traditional business loans generally require collateral or a long list of prerequisites including a stellar credit score and a highly optimistic business proposal, crowdfunding primarily works on the credibility that you can attain through your idea and concept. 

Asset Finance

Asset finance can be a great way to attain short-term business loans or financing that next big leap in your business. In the asset financing option, companies have the option to use their balance sheet assets (inventory, machinery, investments, and more) as collateral to obtain funds from companies. Asset financing is generally considered to be a great way to increase your working capital. 

Here are a few advantages that you can gain as an investor when you choose asset financing: 

• No major losses: Through asset financing, the borrowing company will only be offering up some of their assets as collateral. Hence, in the event of failure to pay the loan, the company will stand to lose only the assets as opposed to bigger commodities in traditional bank loans. 

• Fixed Interest rates: The interest rates associated with asset financing are generally fixed, which not only regulates your repayment burden but also makes it easier for you to maintain your budgeting and accounting reports.

Company Credit Cards

Most credit card companies offer you an option to attain loans against your company credit card. Such loans can be a great way to get some extra financing for your small business or startup as long as you pay off your credit card balance in a timely fashion. Even if you do not opt for a loan, if you find the right credit card company for your needs, you would have enough balance to facilitate most of your business expenses and pay them off in the next bill cycle. 

The primary advantages of using a credit card for financing are: 

• Revolving Credit: A big advantage of using a credit card for financing is that you can take care of small and routine business expenses easily without having to apply for a business loan which can be a tedious process. 

• Business credibility: By making regular payments for your credit cards, you can improve the credibility of your business in the financial market. If you plan to apply for loans in the future, your business credit can help in establishing your trustworthiness. 

Choose the best financing option for your business 

When you embark on the journey of choosing a financing option for your business, it is important to go for the most suitable way rather than the easiest way. As a business owner, you should weigh the pros and cons of your financing option before deciding on the one that best suits your business needs.