What are alternative financing strategies?
Alternative financing is funding provided for businesses outside of traditional bank loans. Alternative lenders offer a range of financing products with flexible requirements. Traditional bank loans tend to be a lengthy and difficult process to qualify for. Fortunately, there are other opportunities available for businesses with some alternative financing strategies.
Invoice factoring is an alternative financing process where a business sells their invoices to a factoring company. In exchange for selling their invoices, the factoring company advances a large percentage of the money owed to the business. They also directly manage payment with your customers. Once the invoice has been completely paid off, the factoring company will send you the remaining balance, minus a small factoring fee for their service.
Invoice factoring provides businesses with immediate, ongoing cash flow. This will allow businesses to meet their short-term financing needs instead of having to wait 30-90 days to receive payment on invoices. Furthermore, credit score, collateral and loan history are not a major factor in getting approved for factoring. This makes receiving funding much faster and more flexible.
Crowdfunding is another alternative source of funding that allows for businesses to raise money from investors. Through the use of social media and crowdfunding websites business owners have the potential to meet investors and raise funding. This strategy allows businesses to raise money without resulting to venture capital investors. However, if the funding goal is not met, any finance that has been pledged will be returned to the investors.
Merchant Cash Advance
With a merchant cash advance, an alternative finance company provides businesses with a lump sum upfront, which is then repaid with a percentage of the business’s sales. This option is best for small businesses that need immediate capital. A traditional MCA is structured where the provider deducts a daily or weekly percentage of your debit and credit card sales until the advance has been fully repaid. This funding can be provided within 24 hours and repayments can be adjusted according to how your business is performing.
Another type of alternative financing strategy is revenue-based financing. Revenue-based financing is a loan that a business pays back with a part of their future revenue. This strategy helps businesses successfully raise the capital needed without sacrificing their equity or any collateral. It also does not involve interest payments – repayment is a predetermined amount plus a flat fee. Monthly payments increase or decrease to match the natural fluctuations of a business, meaning you will not be burdened by payments you cannot afford.
Benefits of revenue-based financing include it being cheaper and more flexible than other funding options, your business will retain more ownership and control of your business, there are no personal guarantees, payments are flexible, you may have a faster funding timeline, and more.