Finance

What is Alternative Financing?

There are many options available for alternative financing to provide the capital needed for any business to stay operational. Ampla dives into the details here.

Jade Thomas

As the old saying goes: “you have to spend money to make money.” When it comes to starting a business, it can take financial assistance to get off the ground. 

However, most traditional banks and credit unions are hesitant when accepting loan applications for new businesses, especially in a constantly evolving and often unstable economy. 

The good news is that there are plenty of other ways to obtain the funding needed to start your business or keep it afloat during tough times. Many in business circles consider these institutions as “alternative financing.”

What Does Alternative Financing Mean?

The most straightforward explanation for alternative financing is that it’s any way that you legally fund your company that is not a bank loan provided by a traditional institution. 

Several options are available online for alternative financing, especially in the modern age of technology. Some of these options are quite risky. Before agreeing to any loans or contracts, be sure to read and understand all of the fine print. 

These institutions are also businesses, and they are trying to survive and profit as well. Take caution to avoid predatory lenders and unreasonable loan terms. 

What Are The Different Types Of Alternative Financing Available?

There is no shortage of options when it comes to finding companies willing to give out a loan. The hard part isn’t finding a willing lender to give you money; it’s finding a good deal that works in your favor

The amount of capital required to start up or maintain a company quickly reaches tens of thousands of dollars. The difference between a tenth of a percent interest rate adds up to a lot of money over time.

You should take the time to compare the loan offers you receive and select the one best suited for your unique financial situation. These are some of the possible alternative financing options available.

Invoice Financing

Invoice financing, also known as accounts receivable financing, is when you borrow money from a lender against the amount of money owed to you by your customers. It requires you to pay a percentage of the invoice amount as a fee to the lender, but it provides growth for your company earlier than if you were to wait until the customers paid their dues. 

This type of financing is proper when selling to large retailers as they will often use credit to purchase products. Instead of having several credit invoices, invoice financing allows you to turn these bills into liquid capital to fund your company continuously. 

Lenders are often willing to deal with invoice financing loans since the customer invoices will be offered as collateral, making it a secure loan. 

These loans aren’t without some risk to lenders as customers might not pay their invoice, but this is rare when dealing with large-scale retailers, so invoice financing loans are often approved.

Asset Financing

Asset financing is similar to invoice financing but covers several options. In your business, your accounts receivable department technically falls under asset financing. 

Other than accounts receivable, asset financing includes anything useful to a business such as product inventory, equipment and machinery, buildings, warehouse, and even property. The overall value of these assets is determined and essentially used as collateral for a secured loan. 

Taking out a loan based on asset financing is risky because defaulting ends with asset forfeiture. Think of invoice financing as a loan out on the money that someone else owes you. The customer pays you eventually, but you just need that liquid capital sooner rather than later. 

You essentially bet significant parts of your business operation on repaying the loan on time with asset financing.

Crowdfunding

Crowdfunding is a newer option than others on this list, but it’s one of the more popular ones for start-up companies that do not have assets or invoices available for financing.

The definition of crowdfunding is what it sounds like: Gathering small amounts of capital investments from a large number of people, in other words, a crowd.

There are different ways that a business goes about creating a crowdfunding pledge. Some companies rely on altruistic donations and do not offer any kind form of repayment to their investors.

However, when growing brand loyalty and positive word of mouth, it’s a smarter option to offer incentives for early investors. Other than reimbursement, companies may offer an early copy of the product, discounts on company merchandise, or even stock options.

Crowdfunding is a great way to gauge the market interest before manufacturing your product. Failure to meet your goal signifies there isn’t a demand for it and saves you from investing in a business model doomed to fail.

Crowdfunding is one of the safer options on this list, but there are a few drawbacks. Fees are a percentage of the total amount reached, and failure to hit the target goal sometimes means the investments are returned, and you get none of the money.

Peer To Peer Lending

Although often mistaken for crowdfunding, peer-to-peer lending is different. Peer-to-peer lending is a combination of a traditional bank loan mixed with crowdfunding. As opposed to pledging your product to anonymous donors on the internet, peer-to-peer lending often requires formal applications involving details about your business. 

You must provide your personal and business credit scores as well as your annual revenue, projected growth, and the amount of time you’ve been running the company. Since peer-to-peer lending is heavily reliant on data, it might not be the best option for businesses just starting. 

However, peer-to-peer lending saves money for a business with a solid financial track record because the interest rates are often more favorable than those offered by traditional banks or credit unions. The lenders are also more flexible on terms and approval than traditional financial institutions that only want to bet on a sure thing.   

Angel Investments

Locating an angel investor is difficult and sometimes requires more luck than the other options on this list, but it’s still possible. 

An angel investor is essentially a person with great personal wealth who provides the capital required to start a business. In return, they require the debt to be repaid with various amounts of interest or require ownership equity and stock options. 

Although angel investments are a fast and easy way of getting the money needed to start a company, they can be risky depending on who you are dealing with. When attempting to negotiate the loan terms, the angel investor essentially has all of the leverage. Having this leverage means they can dictate the terms or bend them to their favor.

An angel investment could be the catalyst your company needs to get off the ground, but make sure you read the fine print and understand the exact terms of the contract.

Grants

Grants are given out by the federal, state, or local government to provide financial assistance to a new business. A grant is essentially a scholarship for a business, meaning that it is awarded and not borrowed.

While this is a great thing for a potential business owner, grants are coveted, and competition is stiff. Because there is a finite grant budget to spread around, you must provide adequate reasoning for why you deserve it more than other applicants.   

The Takeaway

Navigating finances is quite challenging for any business, especially for those that are just starting up. Banks and credit unions might be hesitant to offer up capital funding and loans for startups, particularly during periods of economic instability. It is also difficult and risky to find alternative financing, but there are plenty of options available. 

Ampla is one such option for alternative financing committed to helping our clients grow responsibly and become long-term partners in the process. To learn more about the type of alternative financing we offer to help your business grow, reach out to our team.

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