Alternative Financing Strategies for Growth Businesses
By: Eric Baird
Accessing growth capital is a challenge many businesses face. And the COVID-19 pandemic has only exacerbated the reluctance shown by mainstream banks to lend to small and mid-sized businesses.
The Alternative Finance market is expected to grow by $184bn between 2020 and 2024. And with the US market size being second only to China, debt, equity and other alternative lending strategies are a viable option for US businesses looking to grow.
We’ll discuss 5 alternative financing strategies your company can use right now to set it on its path to growth.
What is Alternative Financing?
Alternative financing schemes refer to business funding offered by institutions and individuals operating outside of the mainstream banking system. Although they often charge higher interest rates or even equity ownership, they are much more flexible than traditional financing options. This is the way to go if your business has no credit history or suffers from poor credit. With all that being said, what are the options available?
Crowdfunding
With more businesses turning to the internet and social media to promote their brands, crowdfunding is a natural choice. Crowdfunding allows you to raise capital for your business from private investors through online platforms. These investors also tend to have an interest in your business’ vision beyond the financial returns.
Crowdfunding is a great way to build excitement around your product. You can also test interest in your product by involving future customers in its development and offering them a finished version ahead of the general public.
You can also give away equity in your business instead of signing up for a repayment schedule. Popular crowdfunding sites include SeedInvest, Mightycause and StartEngine.
Venture Capital
Venture Capital is probably the most publicized option. Venture capital firms invest in high-risk startups with high potential returns. They make their return on investment from your business’ exit strategy (ie. an acquisition or an IPO).
This may not be your best option if you’re looking to keep running your business indefinitely. Plus, they’ll want equity and you may end up losing control of your business.
Venture capitalists work within industries they’re familiar with, especially disruptive industries like technology.
In contrast to venture capitalists who invest other people’s funds, angel investors are wealthy individuals who invest their own money.
Both these types of investors work within their own risk to reward criteria.
Cash Flow Loans
If your business has great growth potential but limited physical assets, cash flow loans are a great option. Business development companies and alternative lenders rely on your projected cash flow to underwrite the loan. They use advanced software to analyze data such as financials, transactions, and expenses.
Fintech
Speaking of software, fintech lenders like OnDeck have seen rapid growth in recent years. Complex algorithms analyze data sets to provide a streamlined loan application that occurs entirely online. Fintech lenders typically have a lower barrier to entry and provide smaller loans and credit options.
Conclusion
No matter the stage of your business, there are plenty of alternative financing strategies available to you. You don’t have to play by the rules of the banks anymore.
Consider all your options weighing cost, risk and flexibility, making sure to keep the best structure in your business that meets your growth objectives.
