Types of Alternative Financing for Businesses

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Capital is the basic requirement of running a business successfully. As a business owner, it is your primary duty to make sure you have a proper arrangement of instant cash to be able to deal with a liquidity crunch. Companies need cash and other investments in order to operate but sometimes it happens that they are not able to generate finances through the proper financial institutions. A few of the reasons why they fail to generate finances is their inability to maintain a top credit score and failure to have complete paperwork, including a business plan. So, where do such companies go for generating that all-important capital? 

One of the most challenging jobs for many small businesses is to arrange capital when they are not in a position to apply for a bank loan. Companies have to justify their business growth plans before the lenders when they apply for a loan package. It can only be processed if you have been maintaining a great credit report and if you are able to meet the requirements of financial institutions. Despite all the efforts, there are times when businesses fail to make lenders believe in their business plans and ideology. This is where these businesses start looking at alternative financing sources.

What is Alternative Financing?

Alternative financing is the type of financing that businesses acquire from external sources other than banks, stocks, and bond markets. It is the non-traditional financing that typically refers to fundraising through online or other external platforms. The merger of finance and technology has revolutionized the loans and credit industry throughout the world. Alternative financing is usually obtained now through online platforms. It is the process that involves matchmaking of borrowers with lenders. 

Alternative finance lenders are filling the void that traditional lending institutions have left for the businesses. Alternative financing is often called business-to-business financing (B2B). There are several types of alternative financing available, some of which are listed below.

Crowdfunding 

This is the most common type of public financing that is an alternative to traditional financing. It is all done through online means like an online portal is a place where different investors co-invest in small-scale businesses. Usually, a small amount of investment is made in businesses that otherwise fail to find traditional financing. It is quite a public affair where the capital is raised via a crowdfunding platform and simultaneously indirect marketing also flourishes the business. Some of the crowdfunding types of alternative business loans providers include Kickstarter, Indiegogo and GoFundMe.

Mezzanine Lenders

Mezzanine lenders are firms that provide financing only to businesses. They don’t require collaterals or any other documents, unlike traditional banking. They might require some equity shares and turn out to be more expensive than any other business loan. This is a great alternative for those companies that are not bankable at all, though it is as expensive as having a credit card.

Grants

Another type of alternative financing is grants. Grants don’t require the financing seeker to repay the amount, like loans. They are usually gifted by other corporations or disbursed in return for some services. Usually, they are given by government organization, trust, or some foundation. If you are someone who seeks a grant, you must present an elaborated business plan which would help you sail through an extensive application process. Grants are usually given to businesses for research or development purposes.

Business-to-Business 

Business-to-business lending has a wide range of companies that offer to lend those who are in dire need of instant cash. They give their customers, mostly businesses, a fair deal to jumpstart their troubled companies. It is also available online. They are the trusted loan providers and it is imperative for businesses to acquire only from such reputable sources. Business-to-business financing is similar to peer-to-peer financing. They facilitate all small and medium-sized enterprises to acquire funding for their business operational needs. Another good thing about business-to-business financing is that you can secure it in a short span of time and generally it is available at competitive rates. 

Merchant Cash Advance

A merchant cash advance is a mode of financing that is available in the form of advance cash against some percentage of your daily credit card receipts or sales. In other words, merchant cash advance providers are buying your future credit card sales in advance, even before you receive them. 

It is an easy and quick way of securing alternative financing. It is important to note that some businesses run only on credit cards or have more inclination towards credit card sales. Industries like restaurants, salons, small retail stores, give leverage of credit card purchase more for a reason to avail this alternative financing, if and when required. So, this type of financing can help you improve your business with a great deal of flexibility.

Asset Financing

Asset financing includes funding against your assets which is also called an asset refinance. In short, you are using your valuable items as security to acquire some amount of loan. Another option for you to acquire asset financing is by leasing your factory equipment and hire purchase for your factory machinery. It is particularly the most convenient type of financing that can help your business in generating quick capital.

Venture Capitalist 

Another type of alternative financing is Venture Capital (VC) where another group provides capital in exchange for your company’s equity ownership. The rate at which you provide ownership or the percentage of the share that is to be given could be decided on the basis of your company’s value. The businesses that are new in the market have a great advantage in this type of alternative financing. When you provide a percentage of ownership to someone, they also start putting their efforts in bringing revenues for your business. Sometimes, the venture capitalist firms provide additional resources like advisors, entrepreneurs, and accelerators.

Business Partner Financing 

In business partner financing, other businesses become your partners by providing much-needed capital injection. In exchange, they could attain access to your products, staff, sales, revenues or business distribution. This type of financing has an added advantage of having a partner who owns a large company or maybe from the same industry making your company rise in the market with their own experience.