Alternative Sources Of Finance For Small Business Owners

Traditional sources of financing are not included in the more conventional alternative sources of finance provided by financial institutions, lending partners, and other alternative funding organizations. They include crowdsourcing, private loans, angel investments, and venture capitalists.

Lenders typically view small business loans as high-risk ventures, so small enterprise owners frequently need to look into an alternate source of finance. Small venture entrepreneurs may find it challenging to obtain funding from banks due to their low assets, short credit histories, and inadequate eligibility for a business loan.

Why Look for Alternative Sources of Finance?

Small business holders may wish to look into alternative financing for several reasons.

• Lack of resources

Many small enterprises lack sufficient assets to use as loan security, so they seek collateral-free business loans. Since traditional lenders are often unwilling to assume the default risk, obtaining a loan may be challenging.

• Inadequate credit history

Many small businesses lack a credible credit history to prospective lenders. So, they may find it difficult to get a loan or even have a line of credit accepted.

• Excessive interest rates

Traditional bank loans charge hefty interest rates. Alternative sources of finance may offer loans to small businesses at a reduced or no interest rate at all.

• Long-time process

Applications for ordinary bank loans can take a long time and lack a guarantee of approval. Alternative financing providers offer a speedier process and a better loan approval rate.

Alternative Sources of Finance for Small Enterprises

If you are having problems raising money for your small enterprises with traditional sources of finance, here are some funding options you can consider.

Borrowing from friends and family

It is the best option for lever collateral and interest-free funding from near and dear or close family members. This is preferable in the form of small business loans and term loans for short-line credit.

Pros

• Depending on your relationship with the lender, small business people might be able to obtain a loan with a significant payback period and no interest. Both small businessmen and lenders/friends can agree on any conditions they like.

Cons

• It might get embarrassing or unpleasant with friends and family. If you fail to pay back the loan for any reason, you may put someone you care about under financial strain.

Crowdfunding 

Launching a fundraising effort might be a great approach to getting the sources of finance for small businesses. Firms should consider using it, especially if they have a loyal customer base. It helps to have a solid plan for starting a crowdfunding campaign advertising a business loan.

Pros

• There may already be people who would be willing to support you.
• The interest rates are cheap or negligible.

Cons

• It is a time-consuming process that requires a lot of effort.
• It might not be the greatest choice if you require money in a short period.

Business grants

Business grants are disbursed by the central, state, or local government in the form of forgivable and subsidized rates loans.

Pros

• They are interest-free or have a reduced rate of debt as compared to the market rate.
• They come with repayment relaxations.

Cons

• Getting grants may be challenging.
• It might not be accessible everywhere.

Angel and private equity investors

Individuals or businesses specializing in funding startups are known as venture capitalists or angel investors. Small company owners who wish to cooperate with one of these individuals must show them why they would benefit from doing so. Typically, a growth plan is required to capture this investment opportunity.

Pros

• It is interest-free debt.
• It supplies frequent and more funds than other sources of financing.
• It also provides guidance and mentoring.

Cons

• It requires you to give up a portion of your business’s equity.
• Finding a venture capitalist or angel investor interested in your business might be difficult.

Online lenders for small business loans

The most acceptable alternative sources of finance for small enterprises are online lenders. By applying for business loans online, i.e., in paperless mode, obtaining these loans is easier than getting conventional bank loans.

Pros

• Obtaining these loans is easier than getting typical bank loans.
• It has an easy application procedure.
• You are fully aware of what you are receiving.
• Customer service support is also there.

Cons

• It comes with higher interest rates than conventional bank loans.
• It also requires security or collateral.

Conclusion

Financing options available for small business loans are changing, and the current status of the economy might make getting a loan seem like a nightmare. There are certain finance alternatives to traditional loans for small businesses and MSME units if they are having trouble getting a bank loan.

Small business owners should look into alternative financing options to meet their operational needs. Flexiloans offers hassle-free small business loans and MSME loans to resolve your credit needs in no time. With our help, you can forget financial woes and focus on scaling your business.