Keeping your business well-oiled with funding is one of the most important criteria to having a successful business. Starting a business using the initial fund is only the first step. Till the time business owners break even and figure out the working capital requirement, they need to very deeply and wisely think of the areas they are going to invest their fund into.
Funding a growing business out of your own pocket might not be a feasible idea. In some time, you might start looking for suitable funding options that will help your business grow and expand comfortably. Needs could range from manufacturing more products, holding inventory, pumping more fuel into your supply chain mechanism, or giving your customers discounts and promotional offers to increase your brand’s reach and awareness. At this stage, after starting off their business, most business owners look for additional funding sources. Their sources can include friends and family and traditional bank loans. However, thanks to fintech, these are not the only options available to business owner these days.
Although, funding from family and friends come at a lower or no interest rate, the amount might not be sufficient or consistent to keep the business running smoothly. As a business owner, you would not want to dilute your precious time looking for funding options every time you need to inject cash into your business. A more stable option is a traditional bank loan which provides you with the required amount at a certain interest rate, but that option, too, is not without hassle.
Traditional banking is known for their long underwriting processes and due diligence that they conduct for every loan application they receive. They typically do not like to invest much of their time and resources into small loan applications, as they spend more on processing the loan than they would make as interest revenue on it. Given the long process and the amount of paper work and back and forth that goes on with loan sanctioning in traditional banks, the business owner might receive the loan really late or might not receive it at all. When a business’s receivables are stuck with customers who are unable to pay upfront and it has run out of credit options, each day’s wait can cause a business more money than it can afford to bear.
It is here alternative lending options prove to be the perfect solution for business owners looking for cash injections to keep their business afloat and thriving.
Small and medium enterprises stand to gain a lot from alternative lending options. These options provide quick financial aid at competitive rates of interest which alternative lenders can manage due to fintech integration in their processes. Purely by running algorithms and codes and through machine learning, fintech solutions cut down the underwriting process from days to a few minutes. Faster underwriting leads to quicker loans, which in turn leads to efficient handling of finances and business for the small business owners, right when they need it.
Here are some of the loan options that business owners can opt for:
1. Short-term business loans
These loans are available in terms that can range from 1 year to 5 years. They work exactly like a traditional bank loan works, however the paperwork and application is completed digitally and entirely online. Unlike traditional banks, small business owners are not required to submit lots of paperwork and the entire process is incredibly fast and efficient.
2. Invoice financing
Also known as invoice factoring, these loans breathe life into small businesses which are fighting to stay afloat as they are unable to keep up their working capital requirements. As discussed earlier, receivables when not realized can push the businesses working capital to the limit. Alternative lenders can step in and buy these receivables and purchase orders from the business for a certain fee. The fee acts as a coverage for the risk they are assuming by taking on the receivables of the said business. In return, the business receives the pending cash and is able continue with business, as usual.
3. Merchant cash advances
As the name mentions, merchant cash advances get small businesses the cash as and when they need it. They can borrow this amount from the lenders in exchange of their future earnings. This option works best for businesses who receive the lion’s share of their revenue from debit and credit card payments. Business owners can get cash in just 24 hours’ time through merchant cash advances.
This is one of the most versatile forms of alternative lending options. The business line of credit can be used to draw funds when you need to boost your working capital, cover gaps in cash flow, buy new inventory, and inject cash in other situations that may need immediate financing. You always have the option of paying back the borrowed amount when you have funds and take out more cash, when you need it later on. It serves as a great fall back option in case of contingencies or other emergencies.
These loans finance up to 100% the cost of equipment that you buy for your business. Equipment includes computers, vehicles, machinery, and any other equipment that you might need to run your business. In this case, the equipment acts as a collateral which means the lender will be more concerned about the value of the equipment than about your credit history or your company’s financial situation.
When it comes to financing their businesses, small business owners have many options. They can either opt for equity or debt financing. Most of the times, business owners prefer to run on debt rather than sell a portion of their ownership for short term cash needs. Debt financing, too, comes with a number of options: traditional and alternative. As discussed, alternative wins the race of speed and efficiency when it comes to churning out quick, bespoke loans that help business owners swim through their cash crunch situations. There is an option to cover the financing requirements of all businesses. All you need to do is find the right one for your business and go for it.