How To Fund Your Small Business Through Alternative Finance

No matter where in the journey your business is, there comes a time when you may need to source business funding – whether this is to get your business off the ground, or whether it’s to reach that next growth milestone. While the traditional route of securing a bank loan seems like a great idea, it’s definitely not as simple as getting an appointment, making a quick pitch and walking away with the money you need.

That’s why there are lots of alternative business funding methods out there for businesses to make use of. Doing your research on your options is really important, because not every form of alternative finance will work for your business. Here’s a few of the most popular options and how they work…

person working on a laptop computer

Alternative small business loans

Banks aren’t the only place to go to for a business loan. There’s a lot of other reputable companies out there that will do the job. They often have a quicker turnaround and higher approval rates, which is an attractive prospect for many. There’s a lot of unsecured business loans out there, which sound quite scary but it basically means that you don’t have to offer assets to fall back on.

Whereas a secured loan uses assets such as real estate or equipment to fall back on should things not work out, an unsecured loan is based on the creditworthiness of the borrower. In today’s digital age, many businesses have intangible assets which makes offering collateral quite difficult. They might have a rented office space, some laptops and not much else. Whilst traditional banks use assets as security, when you’re taking out an unsecured loan, lenders ask for a personal guarantee instead, usually from the company director.

Angel investment

This is a good one for any business needing a little financial help to launch, particularly if the business in question has strong growth prospects. Angel investors look at the future potential of a business as well as its current performance and decide whether to invest money into it. They’re looking for those businesses that have a little something special and service a niche in the market.

Young business team doing high five at conference table

Angel investors don’t look for slick business owners in suits who can talk the talk, or a perfectly articulated PowerPoint presentation. They understand that many small business owners often have limited business experience but have the full potential to build very successful companies. If this sounds like you, then check out Angel List to seek out the right potential investors for your business.

Merchant cash advance

This one is a little different and will only suit a certain type of business – one that makes the majority of their income through credit or debit card transactions, as opposed to by invoicing customers and receiving bank transfers. This makes a merchant cash advance perfect for shops, cafes, restaurants and salons. When it’s taken out, it’s repaid through a business’s credit transactions. A small proportion of this (typically 10-15%) is paid to the advance provider until the total amount borrowed has been repaid.

The biggest draw with this source of finance is that there’s no need to worry about keeping a certain amount of money to one side to pay back on a set date, such as with a traditional bank loan. The repayments are proportional to turnover which makes it super flexible and means a business will never be left in a tricky situation. They’ll pay back more in busy periods and less in lean periods. With high approval rates, zero APR, no fixed term or hidden charges and no need to provide security or a business plan, MCAs are a hit in the alternative business finance world.

Invoice finance

This is a good one for any bloggers out there. Invoice finance is when a third party agrees to buy a businesses unpaid invoices for a fee – ideal for businesses that rely on their invoices being paid on time, but are struggling to achieve this. There are a few different types of invoice financing.

Firstly, there’s invoice factoring. With this method, the invoice financier ‘buys’ the debt owed by the customer when the invoice is raised. They take a percentage of this debt as interest which is where they make their money. The remainder, usually around 85%, is then made available to the business owner upfront. This leaves the business with a steady cash-flow and the financier gets a cut of the sales.

Then there’s invoice trading. This is similar to factoring, however invoice trading uses online platforms to allow businesses to bypass traditional financiers and obtain finance from individual investors instead, similar to peer-to-peer lending.

Lastly, there’s invoice discounting. This is a good option if a business wants the fact that they’re borrowing money to stay confidential. With invoice discounting, the invoice financier wouldn’t manage your sales ledger or collect debts on your behalf, leaving you responsible for collecting debts and remaining the point of contact for your customers.

It’s a comfort to know that there are a lot of options out there to fund your small business. There’s always a way to get your business where it needs to be next. Just make sure you do your research and find the best fit out there for you and your business – and don’t bite off more than you can chew. Keep your practical head on and build that business!

This is a collaborative post.