Alternatives To Traditional Banks for Small Business

Do you need funding? Learn how to finance your startup without using a traditional bank.

Venture capitalists can help you get started quickly by providing funding, networking, and professional advice.

Angel investors, in general, do not demand company stock or claim to be stakeholders in your company.

Grants from the government may be available for businesses focused on science or research.

Starting your own business may be an exciting but challenging experience. While a great business plan is essential for founders, one of the most important elements a company requires to succeed is financing.

Financing a startup or small business, on the other hand, can be a difficult and time-consuming process, especially for those with bad credit. While there is no minimum credit score required to obtain a business loan, traditional lenders typically consider a range to be acceptable.

Consider an alternative loan if you have a low credit score and no collateral to offer. In this article, we will look at three (3) small business funding options, the benefits of alternative lending, and how to finance your business.

Why is it so difficult for small businesses to obtain bank loans?

Small businesses find it difficult to obtain capital for a variety of reasons. It's not that banks are against financing to small businesses; they want to, but traditional financial institutions have an obsolete, labor-intensive lending process and laws that are adverse to local stores and small companies.

The difficulty in obtaining money is complicated by the fact that many small businesses requesting for loans are new, and banks normally prefer to see at least a five-year profile of a healthy business (for example, five years of tax data) before providing an offer.

What exactly is alternative financing?

Alternative financing refers to any method by which business owners can obtain capital without the help of traditional banks. In general, if a funding option is entirely online, it is also considered an alternative financing method. Alternative financing options include crowdfunding, online loan providers, and cryptocurrency, according to this definition.

What are the reasons that small companies might seek alternative financing?

 Small business owners may seek business loan alternatives for a variety of reasons. Here are three of the most prevalent.

•  Lower credit requirements: Traditional banks are nearly guaranteed to refuse loans to borrowers with credit scores below a particular level, which varies by loan provider but is often between 600 and 650.

• Easier qualification: Not all small business owners meet the additional standards for applying for and receiving approval for traditional loans. Alternatives to business loans can be useful in these situations.

• Quicker approval: Traditional bank loans might take weeks to approve, however some business loan alternatives can provide financing in as little as one week.

Alternatives to Traditional Banking for Business Financing

If your small business needs funding but does not qualify for a standard bank loan, alternative financing techniques and lenders may be able to satisfy your needs. Here are some of the best startup and small business financing options.

1. Institutions that finance community development

According to Jennifer Sporzynski, senior vice president for business and workforce development at Coastal Enterprises Inc. (CEI), there are thousands of nonprofit community development finance institutions (CDFIs) across the country that all provide capital to small and microbusiness owners on reasonable terms.

"A wide variety of applications for loans come across our desk every week, many of them from ambitious startups," Sporzynski said. "As a mission-oriented non-bank lender, we know from experience that many viable small businesses struggle to access the capital they need to get started, thrive and grow."

2. Venture Capitalists

Venture capitalists (VCs) are an external group that buys a stake in a firm in exchange for financing. The ownership-to-capital ratios are negotiable and are usually based on the company's valuation.

"This is a good choice for startups who don't have physical collateral to serve as a lien for a bank loan," said Sandra Serkes, CEO of Valora Technologies. "But it is only a fit when there is a demonstrated high growth potential and a competitive edge of some kind, like a patent or captive customer."

A VC's advantages are not solely financial. A relationship with a venture capitalist can give you with a wealth of information, industry connections, and a clear path for your business.

3. Angel investors

Many people confuse angel investors and venture capitalists, yet there is a significant distinction. While a venture capitalist (VC) is a company (typically large and well-established) that invests in your company in exchange for equity, an angel investor is a person who is more likely to invest in a startup or

early-stage company that may not have the shown growth that a VC seeks.

Finding an angel investor can be beneficial in a similar way as obtaining investment from a venture capital firm, however on a more personal level.

Editor’s Note: Do you need a business loan? Click here and fill out the form to have one of our vendor partners contact you with free information.

Alternative lending advantages

According to Serkes, there are a few important advantages to obtaining finance from an unconventional source. She feels that when a business owner takes out an alternative loan, they gain a powerful, invested partner who can introduce them to new clients, analysts, media, and other relationships.

Other advantages of partnering with a nontraditional lender include the following:

● Market credibility: The new business can "borrow" some of the strategic partner's goodwill, and cooperating with a well-known investor provides legitimacy to the brand.

● Infrastructure assistance: The larger partner is likely to have marketing, IT, finance, and HR departments, all of which a startup may "borrow" or use at a discounted fee.

● Overall business advice: As part of the investment, the strategic partner is likely to join your board of directors. Keep in mind that they have a plethora of business expertise, so their advice and perspective will be invaluable.

To succeed, all businesses require working capital. Startup enterprises are more likely to fail if they do not have access to adequate business capital. It may seem impossible to avoid taking out a standard bank loan, but there are a variety of small company funding solutions available to entrepreneurs. Gathering the proper market data and applying the best financing solution for your company improves your company's prospects of long-term survival.

 What steps should small businesses take to prepare to apply for alternative financing?

Applying for funding includes much more than simply filling out an application. Small business owners should do their homework and have a strategy in place to increase their chances of obtaining financing.

Here are five pointers to help you prepare your company for financial success:

1. Determine the amount of money you'll need to borrow ahead of time. When looking for business loan options, you'll probably see that there are a variety of loan amounts accessible. Don't borrow more money than you need; there could be fines if you pay off your loan early or don't use it all.

2. Make a financial projections-based business plan. While not all alternative lenders will require a copy of your business plan, many do, so get started today.

3. Conduct market research and become familiar with the conditions of your industry. Borrowers in growing industries may be more likely to be approved by lenders. As a result, if you can demonstrate that your company's sector or market is ripe for expansion and success, present your case firmly somewhere in your application. It also shows your expertise as an entrepreneur and business strategist.

4. Know your credit score. A credit score below a certain threshold is frequently an automatic disqualifier for loan applications, even if your company is poised for rapid growth and you're working to repay your loans. Determine your credit score, and if it is low, work on improving it before applying for capital.

5. Meet with a small business expert and attend SBA-provided training. You should not make this important small business decision on your own, as you

6. would with any other. Consult with experts and seek training on how to successfully apply for the funding your business requires to thrive.

As a small business owner, you should also have a solid presence online and pay attention to how your business appears online, as lenders will look at this information as well. Online review sites like Yelp, Angie's List, and TripAdvisor may help you construct a picture of your operations and function as a barometer of your overall business health. A lender's decision to grant loans may be influenced by social connections and customer interactions on social media.

Where can I look for company funding options?

Finding funding for your startup can quickly become a full-time job. Financing is at the foundation of any business's success, from creating a network of investors to engaging with other founders, yet it can become a significant time commitment.

 You may take critical steps toward funding your firm by working with the proper investors and taking the time to be deliberate in your pitch. Make no mistake: it will be challenging, but by being specific in your search, you can put yourself in the best possible position to succeed.

"What I find is that when people get lots and lots of rejection and little progress, oftentimes they're just talking to the wrong investors," said Mike Kisch, founder and CEO of sleep technology Beddr. "If they had a better sense as to who the right investor was, they'd see their success rate go up fairly dramatically."

Editor’s Note: Do you need a business loan? Click Get Funded Today and fill out the form to have one of our vendor partners contact you with free information.