What is Alternative Business Funding and Why is it Important Right Now?
Alternative business funding is a topic you’ll want to pay attention to right now if you’re a small business owner. Banks have historically been the “primary” source of funding for SMBs, but the failure of SVB and the Fed’s manipulation of interest rates have shown us that the system needs to change. There are better ways to acquire capital for your business.
The term “alternative business funding” will be used in this article for any type of business funding that is not initiated by a traditional bank or credit union. True alternatives are not governed by the Federal Open Market Committee (FMOC), so rates and terms are wholly at the discretion of the lender. We’ve selected seven funding options that fall into this category:
1. Private Lending Companies (Venture Debt Funding)
Borrowing from the bank means you need to agree to their terms and conditions, which are dependent upon interest rate decisions made by the Fed. Those limitations don’t apply when you borrow from a financial provider like Wise Venture. As a private small business lender, we’re able to set our own interest rates and fees, without government interference.
Interest rates from private lenders will often beat those offered by traditional banks and credit unions. The terms of private loan agreements can also be more flexible, allowing for early repayment without penalties. Business lines of credit can be set up with fixed interest rates, unlike business LOCs from banks that typically have variable interest rates.
2. Venture Capital Investment
As we explained above, venture debt funding comes in the form of a loan or line of credit that needs to be paid back. Venture capital investment, another form of alternative business funding, is an exchange of equity in your company for cash from an investor. You don’t need to pay the money back, but you will need to surrender a share of ownership to get the funds.
There are several factors to consider when deciding between venture debt and venture capital investment. To begin with, you may need to change your business structure to be able to issue shares to new owners. You’ll also need to determine whether giving up ownership and sharing the decision-making powers is going to be worth the cash infusion you get.
3. Crowdfunding Platforms
The global expansion of the internet and the introduction of more secure money transfer options have created the perfect environment for crowdfunding to thrive. Once used only for product launches or new concepts, crowdfunding today is often sought during the pre-launch phase of a start-up. Response rates can be used to measure the potential success of a new company.
There are several crowdfunding platforms available for small business owners seeking funding to get started or expand operations. Kickstarter is one of the more popular ones for startups. GoFundMe is generally used for personal fundraising, but its social media tools also make it a good fit for business financing. Indiegogo is like Kickstarter, but less restrictive.
4. Peer-to-peer Lending Sites
The loan application process on a peer-to-peer lending site looks a lot like applying for a loan from a traditional bank or credit union. The difference is that the money comes from a private group of individuals, not a financial institution. Unfortunately, unlike venture debt lenders, peer-to-peer sites base their decisions on your personal credit history.
Peer-to-peer lending is a type of alternative business funding that you’ll want to be extremely careful with. It’s not controlled by the banks, which would be a good thing in most cases, but that also means their rates and fees aren’t regulated. Peer-to-peer lenders often charge high-interest rates, and their loan contracts may contain hidden fees.
5. Government Business Grants
It’s always a win when you can get money from the government. It’s even better when you don’t have to pay that money back. The Small Business Administration (SBA) offers several grants and funding programs that could be the answer to your small business funding needs. These include trade expansion grants, technology grants, and innovation grants.
The SBA isn’t the only place to find government grants. You can visit Grants.gov to see a list of other grants you can apply for. You’ll find rural business development grants, economic development grants, and city and county programs that offer financial options for small businesses. Review the criteria for each to see if your business is a match.
6. Borrowing from Family and Friends
Asking a family member or friend to borrow money is never an easy conversation. It’s tough to put someone you care about on the spot like that. There’s also a chance the relationship can become irreparably damaged if you’re unable to pay the money back. That’s why we have this option at the bottom of the list. It’s only here because it’s an alternative to a bank loan.
Another way to structure a family and friends deal is to set it up as an investment. That would mean giving an ownership stake to the person you’re asking for money. Are you prepared to share your company with a friend or family member? Think that over carefully before you make this type of deal. You might want to go back and look at venture debt instead.
Why is This Important Right Now?
The failure of Silicon Valley Bank earlier this year was the first of many dominoes that are likely to fall in the next few months. In that instance, poor decisions by bank management are being blamed for the collapse. The system is equally responsible. SVB was the first casualty of the Fed’s failed monetary policy. Expect more to follow as high-interest rates take their toll.
With the risk of more bank failures looming large, loan officers are tightening up their criteria for lending approval. Those more stringent guidelines, combined with higher interest rates and origination fees, make traditional bank financing a less attractive option now than it’s ever been. That’s why it’s important to start looking at alternative business funding.
