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Top Funding Alternatives to Traditional Lending

Lending standards for business loans tightened during the third quarter of 2022, with weaker demand for commercial and industrial loans for companies of all sizes, according to a recent Federal Reserve survey**.

As large banking institutions are reluctant to lend to small businesses, and those that do commonly have long application procedures as well as unfavorable terms that create financial pressure from the start. If you’ve been turned down for financing by a bank, you may be worried about how you’re going to fund your business’s cash flow needs, but there are alternatives that could better suit your company.

Alternative funding options such as invoice finance and working capital loans offer flexibility and speed of access that simply cannot be matched by the “traditional” banks. Lenders typically place less reliance on good credit scores and greater focus on speedier access to products with built-in flexibility.

Here are eight of the top alternative funding options you may want to consider.

1. Invoice Factoring

If your business invoices its customers, invoice factoring can help you avoid the snowball effect of late payments and bad debt. Factoring or accounts receivable financing is a form of asset-based funding that provides regular cash injections throughout the month.

If you decide to use invoice factoring, you also hand over control of your accounts receivable to the factoring company. This may be highly beneficial if you’re struggling to collect debts efficiently, or don’t have the time and resources to maintain effective credit control procedures.

Related: Is Invoice Factoring Right for Your Business?

 2. Working Capital Loan

A working capital loan is intended to help a small business get enough capital in the bank to cover ongoing expenses of the company. There are both advantages and disadvantages to choosing this option. Working capital loans may be used for overhead costs, inventory purchases, or payroll, and in some cases, businesses can receive funds within a day or two.

Although the funds can be received relatively quickly, working capital loans come with some downsides. A working capital loan requires a company to have at least one year in operation, as well as verifiable revenue. Some lenders may also require collateral to back to the loan; without it, a higher interest rate may be charged. Working capital loans can be helpful in a pinch, but they are intended to be short-term loans, which is reflected in the cost.

3. Asset Finance

Asset finance is a way to access the vital equipment and machinery you might need to continue to grow your business. Various forms of asset finance exist, but for new businesses equipment finance it can be invaluable as it’s typically not possible to purchase assets outright at this stage.

Equipment leasing and hire purchase are both forms of equipment finance and offer alternative ways to fund the purchase of expensive assets. You also benefit from spreading the cost over a fixed period of time.

The type of asset finance that’s most suitable depends on your business, but equipment leasing and hire purchase both help you grow sustainably and reduce the risk of using up your working capital.

Related: Selling Accounts Receivables to Finance Your Business

4. Crowdfunding

Crowdfunding may be a good financing option for you at the start-up stage because you don’t have to make any fixed repayments. Various types of crowdfunding exist, one of which uses rewards to attract investment. You can choose to give away your finished product, or perhaps provide investors with a non-financial reward connected to the business.

Another form of crowdfunding is equity-based and involves offering shares to your investors. To attract investments, you pitch your idea on a crowdfunding platform, presenting detailed plans for the business’s future to people specifically looking to invest. In exchange for funding assistance, you offer your microinvestors something in return, such as a free product or service. There are no applications, collateral, credit concerns, or repayment terms.

5. Peer-to-peer Lending

Peer-to-peer lending is similar to crowdfunding in that you attract small amounts of finance from multiple investors. In this case the finance is in the form of a loan rather than being equity-based or reward-based, and interest is paid over a defined period of time.

Peer-to-Peer lending may suit you if your young business is beyond the start-up stage and you’re confident you can keep up repayments. Investors also benefit from a higher rate of interest than that offered by the banks. As a borrower, you pay lower interest rates and can take advantage of the streamlined application process.

6. Angel Investors

An angel investor is a company or person willing to give your company a loan as an investment. Online peer-to-peer lending has made finding angel investors much easier than it used to be. However, it can still be difficult to find one. To maximize your chances of convincing one to invest in your business, you need a solid business plan and an excellent pitch.

7. Community Development Financial Institutions (CDFIs)

Community Development Financial Institutions lend money to microenterprises and sole traders who are unable to secure mainstream funding, and may offer a viable alternative if your business has been turned down for bank finance.

Affordability is a key issue for CDFIs as this type of finance is designed for clients operating in disadvantaged areas, and who are unlikely to meet the eligibility criteria for a standard bank loan.

Related: How to Find the Capital to Fund Your Business

8. Merchant Cash Advance

If you’re a young business that takes debit or credit card payments, you may be able to use merchant cash advances as a funding method. You gain access to regular amounts of working capital based on estimates of future card sales.

While this can be a fast form of borrowing for small businesses, it comes at a high cost. If credit and debit card sales are high, the loan is repaid quickly. However, slower sales may mean a drawn-out repayment that ultimately costs the business more.

The Bottom Line

Small business funding isn’t just about bank loans anymore. With so many viable alternative funding options you can access finance that’s the best fit for your business.

Alternative lenders provide a financial lifeline for small, growing businesses that are so important to our economy. They enable steady and sustainable growth while helping prevent the cash flow problems that so often result in insolvency.

Your Questions Answered Quickly

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.

**Source: Senior Loan Officer Opinion Survey on Bank Lending Practices released November 7, 2022.

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