4 Alternative Finance Options for Small Businesses

American business owners have more finance options open to them now than ever before. Luckily, the reluctance of the banks to lend to small and medium-sized businesses following the financial crash prompted a diverse range of alternative finance providers to step in and fill the void.

Traditional lenders view start-ups and smaller businesses as a riskier lending prospect, and as such, many have imposed stricter lending criteria which can make it difficult for businesses to access the finance they need to grow. To keep their operations running smoothly and ease the cash-flow pressures they face, many businesses are turned away from bank loans and overdrafts and are now favouring the increasingly innovative alternative finance space.

Let’s take a look at some of the alternative finance types available to small businesses and explore the benefits, as well as some of the particular industry needs they meet.

1. Peer-to-peer lending

Peer-to-peer lending is a form of alternative financing that removes the traditional financial institutions from the agreement. Instead, small businesses and entrepreneurs are able to access loans provided by individuals or ‘peers’ with a pre-determined interest rate.

Typically, the amounts businesses can borrow are relatively small, up to a maximum of around $35,000, and are available on relatively short terms of one to five years. In many cases, the loan amount is made up of smaller loans from a number of private lenders.

Peer-to-peer loans are available online and websites will typically provide identification and verification services and will assess the borrowers’ creditworthiness before any loan is agreed. There’s also clear documentation that covers the terms of the loan and the repayment schedule.

The benefits:

  • You could receive more competitive rates than you would from a traditional lender
  • There’s likely to be more flexibility about the timeframe and terms of the loan
  • Borrowers can get approval and receive funds more quickly
  • This is also an option for businesses and entrepreneurs with less than perfect credit scores

2. Crowdfunding

Crowdfunding is one of the buzzwords in the modern American startup, but is it really the answer to your business finance needs? Although it’s often thought of as just an option for startups, businesses of all sizes can use crowdfunding to raise finance from a crowd of investors that include customers and brand fans. In return for their money, the investors receive a stake in the business or are given access to special offers and exclusive products.

Signing up for a crowdfunding site and creating a crowdfunding page is usually free. You’ll then be charged a fee, typically around 5 percent, of the finance you raise. You’ll also have to pay a credit card processing fee of approximately 3 percent of every transaction.

There are lots of crowdfunding sites businesses can use to access the finance they need, many of which target specific industry sectors. That includes:

  • Indiegogo – Originally launched to fund films and other creative projects
  • RocketHub – Targets the arts, science, education and business projects
  • Peerbackers – Focuses on funding entrepreneurs and innovators

The benefits:

  • Pitching your business online can be an excellent source of free marketing
  • You can gauge the public’s reaction to your business and improve it based on feedback
  • It’s an option for businesses that have failed to secure traditional finance
  • You don’t accumulate any debt

3. Financing accounts receivable

Financing accounts receivable, also known as invoice financing, allows businesses to raise finance against their outstanding invoices. Rather than waiting for 30, 60 or 90 days for business customers to make a payment, companies can effectively ‘sell’ their invoices to a finance provider. They typically receive 70-90 percent of the value of the invoice upfront and the balance when the invoice is paid by the customer, minus the finance provider’s fee.

Depending on the type of agreement you have, the responsibility for collecting the payment either remains with your business or transfers to the finance provider. If the finance provider collects the payment from the customer then the fees you pay will be higher.

The benefits:

  • It can help to reduce the cash-flow struggles many businesses face
  • The amount you can borrow increases in line with the value of your invoices
  • No security is required apart from the invoice itself
  • Most businesses are eligible

It can bridge the long gap between orders and receipt of payment in industries such as manufacturing, construction, recruitment and logistics.

4. Asset finance

One type of asset finance small businesses can benefit from is equipment leasing and hire purchase deals that can be used to obtain plant machinery and vehicles. This involves paying a regular charge to use the asset over an agreed period, thereby allowing businesses to avoid the cost of buying the equipment outright and reducing the impact on cash-flow.

The benefits:

  • Improved cash-flow efficiency as large sums are not paid upfront
  • Having the equipment and cash you need to take advantage of growth opportunities that come your way
  • You know exactly how much you’ll have to pay every month which makes it easy to budget
  • Avoiding the costs associated with depreciation

Unable to secure finance from the traditional lending streams? These alternative finance options could help you exploit growth opportunities and unlock the value in your business.

Tony Smith is a co-founder and senior director of Business Expert. As an entrepreneur, Tony gained much of his experience over the last decade in digital marketing and business development, whilst growing a successful insolvency advice firm. Tony is now focused on maintaining the success of his existing businesses, along with Business Expert’s exciting and unique finance platform.