Traditional financing is hard to come by when you run a small business. Banks often require an excellent credit history and at least two years in business. According to a report from Biz2Credit, less than 25% of small business loan requests were approved by big banks in March 2016.
Alternative forms of financing can help small businesses obtain the funds they need to grow and thrive. Here are four alternative financing options for small businesses.
1. P2P Loans
Peer-to-peer lending allows businesses to borrow money from their peers rather than a single lender. A banking platform may approve the loan to go live for bidding, but the funds will come from ordinary people who want to make an investment in your business.
To start the process, businesses must fill out an application. The platform then assesses the business’ credit risk and applies an interest rate to the profile. Investors can then view the profile of the borrower and determine whether they want to invest. Businesses with good credit generally have better luck with P2P loans.
P2P lending rules vary from state to state. The practice is legal in all U.S. states aside from Ohio.
Similar to P2P lending, crowdfunding allows businesses to raise money from their peers. There are four types of crowdfunding: rewards, debt, charity and equity. Platforms like Kickstarter and Indiegogo generally use rewards crowdfunding, while GoFundMe is more focused on charity.
With rewards crowdfunding, the business doesn’t have to pay the money back. Backers are sent something in return for their donation. With equity crowdfunding, those who invest in the business receive a share of the business or product.
Crowdfunding is often used by startups looking to launch a new product or service, small businesses looking to expand and creative professionals looking for funding for a project.
There may be fees associated with the crowdfunding platform.
3. Lines of Credit
A business line of credit can be obtained from a bank or an online lender. Unlike a conventional loan, a line of credit gives you access to a sum of money that you can draw from at any time. Businesses are only charged interest on the amount of money that is withdrawn.
Lines of credit work similarly to a credit card.
If your business is in need of working capital or extra funding to cover expenses during a slow season, a line of credit may be a good option.
4. Invoice Factoring
Invoice factoring is different from other forms of lending. Invoice factoring companies purchase your business’ unpaid invoices at a discount and you receive the majority of the money upfront. The client pays the invoice, and the factoring company sends you a second installment (less the factoring fee).
The factoring fee is a percentage of the total amount of invoices that are being factored. Typically, the factoring fee for 30 days ranges from 1.5% to 4.5%.
Invoice factoring is appropriate for businesses that have unpaid invoices. Bad credit isn’t normally an issue with this form of lending, as the factoring company is more concerned with the client’s ability to pay – not yours.