Every business needs capital to sustain and grow, and alternative financing can help when you most need it. Acquiring inventory, renovating, purchasing top-of-the-line equipment or strengthening operations requires capital. Loans through traditional lenders are obviously a great source for this capital. But, these traditional sources can often be very slow and they have a number of complex qualification requirements. When capital is needed quickly, they are often not a viable option.
That is where alternative small business financing partners come in. Unlike a bank, we are fast sources of capital, usually requiring very little paperwork. They are willing to take greater risks by betting on the future success of established businesses. Understanding the different types of non-traditional financing options available is therefore critical for every business owner. This is because choosing the right type and source of financing can be the difference between success and failure.
Alternative financing isn’t always cheap. However, used wisely, it can be the catalyst that ensures that the business continues to grow and thrive. Here are some of the top reasons why businesses choose alternative financing options when looking for small business loans.
1. Fast Access to Capital
Having fast access to capital allows you to take advantage of opportunities that arise – maybe a new property with an enviable location just came onto the market that would be PERFECT for an expansion; or a manufacturer/distributor is having a huge sale on items that you know your customer base will love – but you need a chunk of cash in order to purchase this inventory. And, you need it FAST. Having a relationship with an alternative financing provider can help to ensure that you won’t lose out on opportunities like these. Because they can get you the cash you need in a very short amount of time.
On the flipside, fast access to capital can also address unforeseen challenges and situations. For instance, your restaurant may be registering good profits and solid growth, but it’s not enough for you to have a large reserve of cash to counter a sudden emergency. So, when your refrigerator suddenly stops working, where do you get the cash to fix the problem…or, worse case scenario, replace the equipment? Every minute with the broken equipment is a dent in your profits. Similarly, when the building landlord can’t have your air conditioner fixed for a couple of weeks, you may have little choice but to fix the problem yourself. In situations like these, a quick infusion of cash through an alternative financing partner becomes a necessity. It immediately gets the access to the capital you need to fix the problem and get your business back on track.
The same situation could arise for other businesses too. Like equipment needed for a big contracting job, inventory needed to service the windfall large order, or a sudden unforeseen expense required to expand physical space in your office for new or existing employees. In these scenarios, an alternative source for small business loans is a solid safeguard for your business.
2. No/Low collateral required
Sometimes, life’s small ironies come with significant learning. Almost everyone will agree that banks only lend you money when you don’t need it! This stems from the fact that they make sure they have enough collateral to get their money back. If your company is looking to takeoff or you just want to make some changes on the operations side, then approaching a bank for a loan may not always work out. This is because you may not fit their meticulous collateral criteria.
Unfortunately, this situation is far too common for most small businesses. Despite diligent planning and attention to micro details, you may find yourself looking for extra capital and a traditional lender is just not going to be able to provide you with the help you need. In situations like these, it may be easier to go for a type of alternative financing. This is an option which focuses on the future success of the business and helps you spread your wings. Some financing options available through these lenders have very low, and sometimes no, collateral requirements. As with any loan, it is important for the business owner to carefully understand and match the financing option to their business’s needs.
3. Short term cash injections
Not everyone needs business financing for long terms. Sometimes, you may be caught in an emergency which can be easily resolved with some capital. Or, your business is facing a seasonal slump, then quick capital can ease your worries. Alternative financing is a great option for a quick short-term cash injection for a relatively short (3 – 18 months) period. This extra capital helps you sustain your business. Be wary – If you find yourself always in need of short-term alternative financing, you may want to revisit your business structure and confirm that it is still the best option for you.
4. Flexible payment terms
A great advantage of many types of alternative financing is that you have the ability to choose the mechanism and timing of your payments – meaning you have the freedom to decide a payment schedule that suits your business the best. Some products allow you to pay back on a daily basis, with daily payment amount being determined by how the business performed on that day (on great days, you pay more; on slow days, you pay less!).
Some give you the option of paying back directly from your bank via ACH or as a portion of every credit card swipe used to pay your business. This flexibility of payment mechanism and type gives small businesses a great advantage to manage their cash flow. The beauty of this arrangement is that the success of the alternative financing provider is tied directly to the success of your business. The same could not be said for traditional lenders!
5. Better small business cash flow management
Perhaps the single most important barometer for financial health, a positive cash flow is the lifeblood of a successful small business. For most small businesses, cash flow management is king. If you ace cash flow management in your business then nothing can stop you. Poor cash management can lead to operational nightmares and financial hardship. Late payments on equipment, real estate rents and even miscalculated inventory can adversely impact your business.
You could find yourself up against numerous challenges, like the inability to make payroll, fulfill tax liabilities or even buy inventory and serve your customers. In a scenario where no traditional loans are available to buttress a temporary decline in small business cash flow, alternative financing comes in handy.