Having access to adequate capital both for short-term and long-term initiatives is a priority for founders and businesses across the world.
Although the dynamics of global business have considerably changed over the last few decades, even today, businesses often struggle to raise capital from traditional sources such as bank and other financial institutions.
As a modern founder, you thus need to look beyond these traditional avenues and explore funding opportunities which will not only help you access adequate capital but also let you keep majority control of your business. In today’s blog post, we will share 5 such funding options that help you do just that.
Alternatives to Bank Financing
In today’s post, we will be exploring five main alternatives to bank financing.
1. Business Credit Cards
2. Merchant Cash Advance
3. Equity Financing, and
4. Unsecured Business Loans
Let’s explore each of them in detail to understand which is most well-suited to your business needs.
1. Business Credit Cards
A business credit card is often a preferred option for businesses looking for short-term financing. Much like its consumer alternative, lenders issue businesses credit cards based on its creditworthiness and its performance in recent history. While the approved limit might vary between lenders, in most cases, it stands around USD56,100 as per an Experian study. Along with this, most lenders also limit the cash advance you can get from your business credit card.
Compared to traditional bank loans, lenders easily approve business credit cards, as you don’t need to present an elaborate business plan.
However, one of the most important aspects to keep in mind when opting for a business credit card is to always pay the due amount within the stipulated time (60 days from the generation of the statement). A default or late payment can not only severely affect your creditworthiness but also cost you a lot more in terms of late payment fees and interest costs.
Thus, a business credit card is most suited for immediate purchases, which will positively affect your cash flow and business performance. For instance, you can use your business credit card to spend on marketing initiatives such as paid campaigns or to stock up on inventory. However, as the approved limit is often less, it is best to reserve business credit cards for short-term financing.
2. Revenue-Based Financing
The next available option is revenue-based financing. A modern funding option, in revenue-based financing, you get instant access to capital without diluting equity or pledging personal collateral. In this arrangement, you agree on a monthly revenue-sharing model to pay back the capital amount plus the platform fee.
Compared to a traditional bank loan, recurring revenue lenders do not require an elaborate business plan. A simple backend integration with your banking system to analyse past revenue sources and forecast future ones will get the job done. This option makes revenue-based financing attractive for small businesses and early-stage companies which have started generating revenue but need an instant injection of cash into the business.
In contrast to a business credit card, the approved capital is significantly higher and interest rates are competitive. Most lenders, however, charge a flat platform fee which is added to the borrowed amount. Yet so, one of the unique advantages of recurring revenue financing is its option of flexible repayment. As businesses agree to a monthly revenue-sharing model (5 to 10% in most cases), it empowers them with the freedom of repaying more as earnings increase. In action, if a business records a higher revenue month, they pay back more and vice versa.
Thus, recurring revenue financing is best for short-term spending, which will have an immediate positive impact on revenue, such as marketing and inventory. However, businesses need to keep in mind that generating revenue is a prerequisite for getting approved and this type of financing is best suited for shorter tenures.
3. Merchant Cash Advance
Merchant cash advance is the same as recurring revenue financing, best suited to offline establishments such as restaurants and gyms. Like revenue-based financing, businesses agree to share a percentage of future revenue in exchange for access to capital.
However, merchant cash advance loans have several differences from traditional bank loans, such as
Merchant cash advance lenders often do not require collateral from the business owner.
In most cases, businesses need to wait multiple weeks to get approved for a bank loan; however, they are usually approved for a merchant cash advance in days.
The loan amount from a merchant cash advance is comparatively less as it depends on the past performance, projected sales and credit rating of your business. Along with this, as it is a collateral-free instrument, the lender often sanctions a low loan amount.
Lastly, in a bank loan, you will need to repay a fixed amount irrespective of how your business performs. However, for a merchant cash advance, you will repay a variable amount based on the factor rate provided by the lender. Most factor rates vary between 1.1 to 1.3 per month and depends on your business’s credit score.
4. Equity Financing
Equity financing is by far the most popular form of investment raised by businesses. Equity financing generally involves founders diluting a stake in their ownership in exchange for capital. Depending on whether an angel investor or a venture capital is leading the round, the equity stake and capital amount might differ considerably.
Equity financing is best suited for early-stage companies which are either yet to hire the right team and build their product or are planning to expand into new markets.
As compared to a bank loan, equity financiers don’t expect a monthly repayment but a stake in your business and often offer additional bonuses such as access to seasoned expertise, mentorship and professional networks. While equity financing is best suited for small businesses looking to raise investments for long-term growth, businesses need to be aware that most financiers expect rapid growth, which may not always be feasible.
5. Unsecured Business Loan
Finally, is an unsecured business loan. These typically arrive with high-interest rates and smaller loan amounts, as the lender is assuming a greater risk while underwriting this loan. Most unsecured business loans offer tenure of 1 to 2 years and thus are best suited for immediate revenue-generating investments, such as customer acquisition.
These days most lenders and fintechs offer unsecured business loans; however, they require extensive business vintage, plans and forecasts to get approved.
Conclusion – Which Loan Is Best for You?
By now, it is clear, that there is no one option for every business. The type of loan which is best suited for your business depends on a host of factors, right from its use case to your growth and repayment ability. The options are in front of you, now go ahead and decide.
Looking to get funded? Contact us today to learn how we help leading businesses get instant access to capital without diluting equity.
