Alternative Loans For Small Business

Top Online Platform-Based (OPB)

Small Business Funders Insights, Since 2007:

For borrowers, the combination of lower repayment rates (relative to bank loans) and more convenience, both P2P and OPB loans are well worth a look.

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Online Platform-Based Business Funding (OPB)

Online Platform-based Business funding, or “OPB” is defined as loans to businesses that provide a lump sum amount in exchange for a share of future transactions/sales. Much like the structure associated with venture capital deals, the upfront money does come with financial strings attached that go beyond simply paying off a loan—OPB funders want a cut of a company’s futures revenues, too.  The analytical firm Research and Markets calls OPB funding “a purchase and sale of future income” that primarily aims at businesses “having strong credit card sales like retail, restaurant and service industry.”

Merchant Cash Advance

For business owners who can’t get a traditional loan, and who may have less than stellar credit, a merchant cash advance is another route to alternative financing. MCA’s are not a loan. Instead, this form of funding is deemed as the sale of a company’s future credit sales at a discount. A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future sales. Instead of making one fixed payment every month from a bank account over a set repayment period, with a merchant cash advance you make daily or weekly payments, plus fees, until the advance is paid in full. The good news for borrowers is credit can be approved quickly, without volume-heavy paperwork associated with traditional bank small business loans.

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Factoring

Factoring is a source of finance for small businesses. In other words, a cash-strapped business, unable to get desperately needed funds, sells off its invoices, that are called account receivables, to a third party and in exchange, gets the much needed cash. Small business factoring is cited by many industry observers as the “smart alternative” to bank loans. Just like merchant cash advances, factoring can be a viable option for small business owners as factoring financing approvals aren’t based on the business owner’s credit health, but on the company’s clients’ credit health. Factor financing is also good for small firms facing a cash-flow crunch or slow-paying clients. 

Invoice factoring can provide immediate working capital to help cover a funding gap caused by slow-paying customers. Improved cash flow: You can keep loyal customers on longer payment terms but still improve your cash flow to help you grow your business. Instead of waiting 30-to-60 days to get paid by customers, small business owners get access to cash within 48 hours, by opting for the factoring route. The size of the factoring market is in the billions, although much of those assets are tied to specific industries, like trucking, retail, construction, and health care.

Crowdfunding

Crowdfunding is a way for people, businesses and charities to raise money. It works through individuals or organizations who invest in (or donate to) crowdfunding projects in return for a potential profit or reward. With crowdfunding, business owners shouldn’t expect big chunks of money coming via crowdfunding – the average “donation” is only $88. But if you get enough donations of $50, $100, or $150, the funds can add up. Donors who give are passionate about the business idea and want to see it get off the ground for myriad reasons. But with some platforms, if the crowdfunding campaign doesn’t reach a predetermined financial goal, all bets are off, and the monies are returned to the original donors, a result that about 50% of crowdfunding participants experience.

The most successful crowdfunding timelines are between 30 and 39 days. Any less, and you’re not reaching maximum asset volume potential. Any more, and you’re risking oversaturating the market and running, fairly or unfairly, a stale funding campaign. Kickstarter (almost $2 billion raised since 2009) and Indiegogo (over $500 billion) are two popular crowdfunding sites used by entrepreneurs

Revenue-Based Loans

What if small business owners could raise capital by promising investors a future, set percentage of revenues? That’s the promise behind revenue-based loans. Basically, revenue-based financing (RBF) is a hybrid financing method that fills a need in the growth capital market for companies with approximately $1 to $10 million in revenue and a proven plan for growth.

Small Business Credit Cards

A credit card is a fast and easy way to get capital, and most funders have cards specifically geared toward small businesses. Unlike other forms of financing, credit cards usually come with a points or rewards system of some kind, and you may be able to leverage that to help your business even further. Small business credit cards have higher interest rates and have credit limits.

A “Game Changer” in Small Business Funding

Alternative funding has emerged as a large player in the financial market due to technological advancements online and inelastic operations of traditional banking institutions.

Banks may be too late in saving their small business customers, many of which are turning to a new financing source—alternative Funders.

While figures for such a new industry vary (alternative funding launched in 2005, economists say), the market is conventionally valued at $600 billion by the end of 2020.

While the past 10 years have demonstrated tremendous growth in the alternative funding market, the next decade should show higher growth. Alternative funding is on an upward path, and that’s welcome news to businesses looking for a different path to company financing.

Alternative funding Growth by 2020

Primarily, five industry segments:

• Online Funding
• Merchant Cash Advance
• Factoring
• Crowdfunding
• Revenue Based Loans

How?

• By meeting the demand growth in the need for larger, more complex loans; especially to business-to-business companies.
• By “fitting the bill” as business borrowers focus on “mainstreaming” alternative funding for all businesses.
• By accommodating heightened expectations from business owners on ease and speed of accessing capital, as they continue to sour on traditional funders.