Launching a new business can be an exciting experience but it is riddled with one challenge after another – most commonly financial issues that can derail the journey before it even gets started. The obvious solution to this problem is business financing. Most entrepreneurs tend to go for traditional bank loans. However, as a new business, your firm might not even meet the criteria required by most traditional lenders. And this can put your business in a soup. Fortunately, the lending environment now includes various alternative funding options that can provide the necessary capital to get your new business running. But you still need to know what financing options fall under this category so that you can make an informed decision and choose the funding that works for you.
This article will walk you through the popular loans for new businesses in alternative financing so that you can find the best funding option for you.
What is an Alternative Financing Loan?
An alternative business loan is any loan that is provided by a non banking lender. It can be any fintech or online lender. Usually, borrowers who do not get loans for new businesses from traditional banks, credit unions, SBA or other conventional financial institutions opt for alternative financing solutions as these lenders do not have the stringent criteria that traditional lenders have. This type of lending can be an ideal funding solution for high-risk businesses, firms with low credit, needing a smaller loan amount, or minority-owned businesses as they are more flexible and can find ways around obstacles that these businesses face in need of funding.
Loans for New Businesses: Why Should Entrepreneurs Consider Alternative Funding Options?
Besides being less rigid than traditional bank loans, alternative funding options offer various benefits. Here are three main reasons why entrepreneurs typically opt for alternative financing solutions when they need loans for new businesses.
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Flexibility
Most alternative financing lenders are dedicated to understanding the financial needs of a borrower. They know the importance of flexibility. That’s why most of them have simpler guidelines to make the application process easy and minimize the disbursal time. This aspect of alternative funding makes a big difference to small businesses with urgent requirements. Loan applications get approved within days, sometimes even hours.
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Adjustable with Low Credit Score
Businesses with low or poor credit scores often form the major chunk of alternative funding applicants. As these types of lenders understand that lower credit score applications can provide a goldmine of opportunities with traditional banks not competing with them in this sector, they provide more financing sources that are more favorable to lower credit ratings.
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No Collateral or Equity
With traditional loans, most businesses have to offer collateral or give up stakes in their companies to secure funding. This is a very unpleasant aspect of traditional funding that most businesses suffer from. With alternative financing, this is not the case. Most loans for new businesses offered by alternative lenders do not require any collateral or equity, making this suitable for most businesses.
Top Alternative Funding Options for New Businesses
Here are a few alternative funding options if you are looking for loans for new businesses:
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Revenue-Based Financing (RBF)
RBF or royalty-based funding allows borrowers to raise money by repaying investors with a percentage of their future revenue rather than fixed monthly payments or equity stakes. Most traditional bank loans levy fixed monthly installments that may make it difficult for businesses with fluctuating monthly revenue to repay the loan during lean periods. So, the repayment is proportional to the monthly income earned, which does not put a strain on a firm’s regular cash flow. It differs from equity financing too as it does not require borrowers to dilute their company’s equity. Rather, lenders receive a percentage of the business’s monthly revenue on an ongoing basis.
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Benefits
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- Payments fluctuate with revenue.
- No need for collateral.
- Quick approval and funding.
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Disadvantages
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- High interest rates often lead to higher overall loan costs
- Only suitable for businesses with solid revenue potential in the future.
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Merchant Cash Advances (MCA)
MCA offers a large amount of cash upfront to a business in return for a percentage of future credit or debit card sales. These loans are suitable for those businesses that experience high credit card sales but variable income. But in comparison to traditional business loans, a merchant loan (MCA loan) is not a loan. It is an advance given on future sales, making it perfect for businesses with poor credit.
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Benefits
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- Fast funding process.
- A high credit score is not required, so it can work with low scores too.
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Disadvantages
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- High internal fees compared to traditional loans.
- The repayment cycle is typically daily or weekly, making it unsuitable for new businesses.
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Working Capital Term Loans
A working capital term loan is designed to cover a company’s short-term operational needs. This includes expenses like payroll, rent, inventory purchases, and other day-to-day costs. Unlike long-term loans for new businesses, these funds are typically repaid within a year, making them ideal for immediate financial needs.
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Benefits
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- Fast funding.
- No need for high credit scores.
- Fixed repayment schedules.
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Disadvantages
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- Steep interest rates.
- Repayment cycles tend to be shorter than traditional loans.
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Crowdfunding
In this type of funding, entrepreneurs typically raise money from many small investors via platforms like Kickstarter or Indiegogo. Often used by startups to test their product in the market before launching.
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Benefits
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- A wide range of potential investors can be tapped into.
- No need to repay the funds as the funds are given as donations.
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Disadvantages
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- No guarantee in raising the funds.
- It takes time and effort to get the campaign promoted.
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Business Credit Cards
Unlike personal credit cards, business credit cards come with higher spending limits than personal cards, which can be helpful to make large purchases for your business. These cards also provide rewards and perks tailored to businesses, such as cash back on business-related expenses.
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Benefits
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- Fast access to capital.
- Perks and rewards such as cash backs are typically given with every transaction.
- Helps in building business credit.
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Disadvantages
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- Sky-high interest rates.
- Applicants may need to provide personal guarantees.
Conclusion
In today’s dynamic lending world, borrowers do not need to depend on just one type of business loan to get their funding. There are new options, particularly alternative financing solutions that can provide the best loans for new businesses in America. But borrowers need to do their due diligence before starting the application process.
Interesting Related Article: “How to Use Loans to Build Credit History Responsibly“