Simply put, alternative funding for a business is getting a loan outside of traditional bank financing to fund capital for the business. These funds and loans are placed aside specifically for new entrepreneurs and small businesses. In most cases, they offer much less severe penalties and usually offer more attractive terms for new startups to navigate their initial financial necessities.
A big reason why many people turn to an alternative financing route is that conventional banks and lending institutions are not as willing to take risks with new businesses. Banks want to make money, and they typically do this by issuing loans with interest rates that are high and affordable. Most of these loans are also secured by a home or other tangible assets. This means that if the business tanks and no longer makes payments on its debt, the owner is toast.
However, an alternative funding strategy allows a small business owner to skip the costly and lengthy application process associated with traditional bank financing. Instead, they simply provide a personal guarantee to a lender that the business will be able to repay the debt within a specific period of time Alternative funding. When asked to produce creditworthiness documents, the small business will simply point to a list of recent profits.
In terms of the pros and cons of this option, it’s easy to see how the pros would outweigh the cons. For one, the alternative funding source doesn’t require a loan to get started. Once the cash is needed, there is little risk because the borrower already has a proven track record of meeting its deadlines and fulfilling its responsibilities. Also, unlike traditional working capital loans, there is no collateral or asset requirement. Finally, working capital loans from an alternative funding source come at very low interest rates.
On the other hand, the cons of using alternative funding sources far outweigh the pros. Perhaps the most obvious drawback is that borrowers stand the risk of losing their home or other property should they default on their debt obligations. While not always the case, some lenders will also foreclose on homes based on the failure of their loan payments. Home equity loans are also notorious for high interest rates and fees. Finally, this type of financing is most commonly only available to new businesses.
Private loans offer another type of financing solution for businesses. This type of financing comes in two flavors – venture capital loans and commercial lending. Venture capital loans are used to provide short-term funding to startups. They generally have higher interest rates than other forms of financing, but there are many successful companies that have received these types of funding and returned positive profits.
Commercial lending is the more traditional method of getting a business started. This involves securing traditional bank loans from a financial institution in order to get a business up and running. This type of financing will typically require that borrowers have a very good business credit score, as the risk of non-payment is greater with a bad credit score. A business will also need to convince a traditional bank that it has enough collateral to secure a loan with a specific repayment plan.
Many borrowers are turning to non-traditional loans in order to fund their businesses. These methods have become more popular as banks have tightened their lending rules in light of the global credit crunch. In this case, the borrower must have a decent credit score and a profitable business plan in order to qualify for traditional loans. This loan option will also likely require that borrowers have a business plan with a detailed forecast of how they intend to use the funds from the loan. If borrowers do not intend to repay the funds, their chances of securing traditional bank loans in the future are bleak.