Financing your business can be a long, grueling process. If you don’t meet every single requirement or have a hiccup in your credit history, a bank will likely turn you away, leaving you discouraged and frustrated. As a result, alternative business funding—obtaining financing from sources other than traditional banks—has become increasingly popular among small business owners.
There are several advantages to seeking alternative business funding. Among these:
1. There are more options.
When you go to a bank, your only option is to apply for a business loan. Alternative business funding offers many more lending options. A merchant cash advance, whereby a business owner sells a portion of his or her organization’s future credit card sales to obtain capital now, is just one example. Others include crowdfunding, which involves raising money from a wide range of contributors, and peer-to-peer lending, an online marketplace of lenders and merchants.
2. The requirements tend to be more lenient.
A good credit score is required to obtain a traditional business loan. So is a detailed explanation of how you plan on utilizing the funds received. The amount of time you’ve been in business will also be a factor. Additionally, you'll have to provide a long list of personal and professional documents, including tax returns, profit and loss statements, and bank statements. If any of this information is not up to par, you’ll likely not qualify.
With alternative business funding, however, the requirements are not as stringent, in most cases. For instance, if your credit score is on the lower side, you may still qualify. Again, this varies from lender to lender, but there is a good chance you’ll be approved.
3. The application process is quick.
Applying for a business loan from a bank takes more time and energy, and you might not hear back right away. But when applying for another type of financing, you could receive a response after just a few days. This gets the money into your hands faster—within about a week—so you can begin growing your business sooner, rather than later. Plus, you can spend the funds any way you want without having to obtain permission from your lender. Need more inventory? Check! Looking to update your company’s equipment? Done!
4. The repayment process is usually more flexible.
When you take out a business loan, you have to make monthly payments to the bank until you pay back every cent you borrowed, plus interest. The repayment process for alternative financing, however, doesn’t always require you to pay back a specific dollar amount every four weeks. For example, with a merchant cash advance, you don’t make any payments. Instead, your lender simply takes a certain percentage of the money you earned through credit card transactions each day. Consequently, there isn’t a set date you must reimburse your lender by. So if you have a slow month, you will reduce your repayment amount by less than you would during a high sales month.