Startup founders and small business owners often seek funding when launching a new business, purchasing inventory, or growing and strengthening their current business. In the past, they would seek out venture capitalists, angel investors, or visit their local bank to get the money needed. When the amount wasn’t too much, they would ask family and friends or even bootstrap the funding needed with their own money.
However, we’ve entered a new era of startup and business financing where you can easily find the right funding for your specific needs through alternative lending. On top of that, alternative sources of funding can be more accessible than traditional funding.
With that in mind, here are 18 ways to use alternative lending within your business.
Instead paying back money, non-equity based crowdfunding allows you to offer lenders rewards, such as copies of the company’s product, merchandise, and mementos for supporting your business idea. Kickstarter, Indiegogo and DreamFunded are three the most popular crowdfunding sites out there.
Crowdfunding sites are also a great to validate your business idea because if it doesn’t meet its goals then there may not be a market for your business.
With sites like Funding Circle or Lending Club you get loans from peers. This form of funding can give you the money that you need almost immediately since you’re dealing directly with the lender. Approval ratings are also higher with peer-to-peer lending, despite the higher interest rates. This is a great option when you need a cash injection quickly.
Factoring isn’t a typical loan. Instead, you sell your accounts receivable to a financial institution or “factor”. In exchange, you’ll be advanced a portion of the receivables, typically 75% to 80%. The remaining percentage is held by the factor. Typically the advanced funds are released within 24 hours. As with P2P lending, this is a great option when you need cash up front, especially if you’re selling B2B services or products.
Small Business Administration Loans
If you’re looking to start or expand your business but have had difficulty securing a traditional loan, then you definitely want to check out the loans offered by the Small Business Administration (SBA). If you’re a nonprofit or educational organization the SBA also offer grants. When we started our eCash company, this is what helped us get off the ground without giving up equity in our company.
Working Capital Loan
As explained on NerdWallet, “Working capital loans can help you pay for everyday business expenses such as rent, payroll and debt payments.” For example, if you don’t have a great credit score, but at least $50,000 in annual revenue, then a company like Kabbage will offer “quick working capital loans to help keep you afloat.” Just be aware that annual percentage rates are higher than at some other online lenders.
If you have a perfect pitch, but are in a high-risk industry, like asset- or technology-concept backed companies, and need more like yesterday, then you can seek out hedge-fund lenders. Be wary of high borrowing costs and prepayment penalties.
Microloans are usually for non-profit organizations who may not be able to qualify for a traditional loan. However, the SBA also offers microloans for small businesses who need working capital or to purchase inventory, equipment, or make repairs.
Lines of Credit
If you require money for short-term expenses like purchasing equipment, expanding inventory, or covering operating costs, then you could obtain a line of credit from a financing company. In a way, this is similar to credit cards where you’re given a certain amount of money to use as however you like. You’re only charged interest for the amount that you withdraw, but those interest rates can be expensive.
If you have multiple streams of income, a savings account, or are willing to refinance your home by getting a second mortgage, then you could put that money into your business when you need it, but are unable to secure a business loan elsewhere.
Merchant Cash Advance
A merchant cash advance is where you pay back a lender with a percentage of your daily credit card sales. It’s fast access to capital, has an easy approval process, and may even be issued if you have bad credit. On the downside, the fees are expensive and it could decrease your cash flow.
Credit Card Lenders
If you have a solid credit score and need fast access to money then applying for a business credit card can be one of the best alternatives for lending. Be cautious of high-interest rates the expensive penalties that can incur if you miss a payment.
There are a number of startup competitions where the winning business could receive a cash prize. For example, participating in LAUNCH could help you win $2,500.
Purchase Order and Trade Finance
This is a variation of factoring where a purchase order financing company pays your business for goods that are needed to fulfill an order. After the order has been fulfilled, the buyer will reimburse the purchase order financing company. In other words, the goods are used as collateral, which means it doesn’t involve a line of credit. It’s a great option if you have cash flow problems and need to fulfill a large order.
Convertible Debt Loans
In short, convertible debt loans are where you give-up some of the future equity of your business in exchange for a loan. It’s a flexible financing option that has a high risk /reward for both parties involved.
If you have just one-product you can start selling it to customers before it’s released on the market. One of the advantages of this alternative financing option is that it can help prevent you from manufacturing too much. In other words, if you started a t-shirt company, and pre-sold 1,000 shirts, then that’s all you would produce for now.
You could also secure a loan from a competitor or partner. The catch? You promote its products or services on your site for an agreed upon number of years.
We’ve pulled together a full list of alternative lending platforms for businesses, that can also be helpful in learning more.
This blog comes as a guest post from John Rampton, CEO of Due.com. John Rampton is an entrepreneur, investor, online marketing guru, and startup enthusiast. He is the founder of the online payments company Due. Follow John on Twitter at @johnrampton.
For more information on Dwolla’s ACH API, check out some additional blog posts:
- A Payment API for B2B SaaS Companies
- A Beginners Guide to ACH payments
- Getting started with a bank transfer integration
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