Small businesses play a vital role in the global economy. They create jobs, spur innovation, and contribute to the growth of local communities.
However, small businesses often struggle to secure traditional financing from banks and other financial institutions. This is where alternative financing options come in.
Alternative financing options for small businesses refer to non-traditional methods of funding that are available outside of the traditional banking system.
These options have become increasingly popular in recent years, as they offer a more accessible and flexible way for small businesses to obtain funding.
One of the most common alternative financing options for small businesses is crowdfunding.
Crowdfunding is a method of raising funds by soliciting small contributions from a large number of people, typically through an online platform.
This option has become particularly popular among small businesses looking to launch new products or services.
Een some well-established brands use this method as a go-to when planning to release an experimental product instead of burning through their own cash reserves.
Another popular alternative financing option is peer-to-peer lending. Peer-to-peer lending platforms connect borrowers with individual lenders who are willing to provide funds at a lower interest rate than traditional banks.
This option is particularly useful for small businesses with less-than-perfect credit scores, as peer-to-peer lending platforms often have less stringent requirements than traditional banks.
Invoice factoring is another alternative financing option that has gained popularity in recent years.
Invoice factoring involves selling outstanding invoices to a third-party company at a discount in exchange for immediate payment.
This option is particularly useful for small businesses that need to improve their cash flow but do not want to take on additional debt.
Alternative financing options also include equipment financing, merchant cash advances, and revenue-based financing, among others.
Each of these options offers unique benefits and drawbacks, and small business owners should carefully consider their options before choosing the best financing option for their business.
These financing options for small businesses offer a much-needed solution for entrepreneurs who struggle to secure traditional financing.
These options provide more accessible and flexible funding options that can help small businesses grow and thrive.
As the global economy continues to evolve, it is likely that we will see more innovative and creative financing options emerge to meet the needs of small businesses in the future.
Below, we’ll discuss some of the best alternative financing methods that every small business owner should know in 2023.
Crowdfunding has emerged as a popular alternative financing method for small businesses in 2023.
This method allows businesses to raise funds from a large pool of investors, often through online platforms.
It is particularly useful for startups or businesses that have difficulty accessing traditional financing, as it allows them to bypass the often stringent requirements of banks and other lenders.
Crowdfunding typically involves offering incentives or rewards to investors, such as early access to a product or service, exclusive merchandise, or other perks.
In some cases, businesses may also offer equity or debt-based crowdfunding, where investors receive a share of ownership in the company or a return on their investment.
One of the key advantages of crowdfunding is that it can help businesses build a community of supporters and advocates who can help spread the word about their products or services.
This can be particularly valuable for startups or businesses in niche markets that may not have access to traditional marketing channels.
However, crowdfunding does come with some risks and challenges. For example, businesses need to be able to effectively market their campaign and engage with potential investors, which can be time-consuming and require a significant investment of resources.
Additionally, there is no guarantee that a crowdfunding campaign will be successful, and businesses may need to set realistic funding targets and develop contingency plans in case their campaign falls short.
Some of the top crowdfunding services for small businesses in 2023 include:
- Kickstarter: One of the most popular crowdfunding platforms, Kickstarter focuses on creative projects and allows businesses to offer rewards in exchange for pledges.
- Indiegogo: A popular platform for both creative and entrepreneurial projects, Indiegogo offers both reward-based and equity-based crowdfunding options.
- Crowdfunder: This platform specializes in equity-based crowdfunding, allowing businesses to raise funds from investors in exchange for equity.
- GoFundMe: While primarily used for personal fundraising campaigns, GoFundMe also allows businesses to create campaigns for specific projects or initiatives.
- SeedInvest: This equity crowdfunding platform specializes in helping startups and early-stage businesses raise capital from accredited investors.
Crowdfunding can be a valuable financing option for small businesses in 2023, providing access to capital while also building a community of supporters and advocates.
However, it’s important for businesses to carefully consider their options and develop a comprehensive crowdfunding strategy to ensure a successful campaign.
Peer-to-peer Lending Networks
Peer-to-peer (P2P) lending networks have become a popular alternative financing method for small businesses in recent years, and this trend is expected to continue in 2023.
P2P lending networks allow small businesses to access funding from a pool of individual investors, without going through traditional financial institutions.
This can be especially beneficial for small businesses that may not qualify for traditional loans due to a lack of credit history, collateral, or other factors.
P2P lending networks typically work by allowing small businesses to create a loan request on a platform, specifying the amount they need and the terms they are willing to offer.
Investors can then review these loan requests and choose to invest in those that align with their investment goals and risk tolerance.
Once enough investors have committed to funding a loan request, the funds are transferred to the small business, which then makes monthly payments to the investors.
One of the key advantages of P2P lending networks is that they often offer lower interest rates and fees compared to traditional lenders since they have lower overhead costs and may be able to offer more flexible terms.
However, it’s important for small businesses to carefully consider the risks and drawbacks of P2P lending as well, such as the potential for default and the lack of regulatory oversight.
Some advantages of P2P lending networks for small businesses include:
- Faster approval and funding times compared to traditional lenders
- Potentially lower interest rates and fees
- More flexible repayment terms
- Access to a wider range of lenders and investors
Here are some of the best P2P lending network services for small businesses in 2023:
Each of these platforms has different features and requirements, so it’s important for businesses to research and compare their options carefully before choosing a P2P lending network to work with.
Invoice financing or factoring
Invoice financing or factoring is a type of alternative financing that can be beneficial for small businesses in 2023.
This method involves selling outstanding invoices to a third-party company, often referred to as a factor, at a discounted rate in exchange for immediate cash flow.
Essentially, this allows a business to receive money upfront for work they have already completed but haven’t been paid for yet.
Invoice financing can be useful for small businesses because it allows them to access funds quickly, without having to wait for customers to pay their invoices.
This can help businesses maintain steady cash flow, which is crucial for operations and growth. Additionally, factoring companies often handle collections and credit checks, which can relieve the burden on small businesses and free up time to focus on other areas.
Some of the best invoice financing or factoring services in 2023 include:
- BlueVine – Offers invoice factoring and invoice financing services, with funding available within 24 hours.
- Fundbox – Offers invoice financing and a revolving credit line, with easy online application and fast funding.
- Riviera Finance – Offers non-recourse factoring with high advance rates, as well as credit protection and collection services.
- TCI Business Capital – Offers factoring services for small businesses in various industries, with no hidden fees or long-term contracts.
- Paragon Financial Group – Offers invoice factoring, purchase order financing, and other funding options for small businesses.
It’s important for small businesses to carefully research and compare different invoice financing or factoring services before making a decision.
Factors such as fees, advance rates, and credit checks can vary between providers, and businesses should choose a service that best fits their needs and budget.
Overall, invoice financing or factoring can be a useful alternative financing method for small businesses in 2023, providing quick access to cash flow and reducing the burden of collections and credit checks.
Merchant cash advances
Merchant cash advances (MCAs) are a popular alternative financing method for small businesses in 2023.
Essentially, an MCA is a lump sum of cash that is advanced to a business in exchange for a percentage of its future credit and debit card sales.
This type of financing can be attractive to small businesses that need quick access to cash but may not qualify for traditional bank loans or other financing options.
The process for obtaining an MCA is typically fairly straightforward. A business owner applies for an advance and provides documentation of its credit and debit card sales.
The MCA provider evaluates the application and offers a lump sum of cash, which is typically repaid over a period of several months.
Repayment is typically made through daily or weekly deductions from the business’s credit and debit card sales, with the MCA provider taking a percentage of each sale until the advance is repaid in full.
One potential downside of MCAs is that they can be expensive. Because they are considered high-risk financing options, MCA providers may charge higher fees and interest rates than traditional lenders.
Additionally, the daily or weekly repayment schedule can be challenging for businesses with irregular sales patterns, as it can lead to cash flow problems if sales are slow.
Despite these potential drawbacks, MCAs can be a useful financing option for small businesses in need of quick cash. Some of the best MCA providers in 2023 include:
- National Funding: Offers MCAs up to $500,000, with repayment terms ranging from 3 to 18 months. Fees start at 1.17% of the advance amount per month.
- Rapid Finance: Offers MCAs up to $1 million, with repayment terms ranging from 4 to 18 months. Fees start at 1.09% of the advance amount per week.
Overall, merchant cash advances can be a useful financing option for small businesses in 2023. However, it’s important to carefully evaluate the costs and terms of any MCA before accepting an offer and to consider alternative financing options as well.
Revenue-based financing (RBF) is an alternative financing method for small businesses in 2023 that allows a company to obtain capital in exchange for a percentage of their future revenue.
RBF has become increasingly popular in recent years as a flexible and non-dilutive funding option for small businesses that may not be able to qualify for traditional bank loans or prefer not to give up equity in exchange for funding.
With RBF, the financing company provides funding to the small business in exchange for a percentage of their future revenue until a predetermined amount is repaid.
The percentage of revenue paid back typically ranges from 1% to 10%, depending on the amount of funding and the financial health of the business.
Unlike traditional loans, RBF payments are tied to revenue, so if a business has a slower month, they pay less, and if they have a higher month, they pay more.
RBF is particularly beneficial for companies that have a predictable revenue stream, such as those with recurring subscription models or long-term contracts.
This financing option also allows small businesses to maintain control of their company without having to give up equity, and the repayment terms are typically more flexible than traditional loans.
Some of the best RBF services for small businesses in 2023 include:
- Lighter Capital: Lighter Capital offers RBF funding to companies with annual revenue between $500,000 and $15 million. They have a streamlined application process and can provide funding in as little as four weeks.
- Kapitus: Kapitus offers RBF funding to businesses with annual revenue between $250,000 and $10 million. They provide funding in as little as two days and offer flexible repayment terms.
- Bigfoot Capital: Bigfoot Capital offers RBF funding to companies with annual revenue between $500,000 and $15 million. They have no minimum credit score requirements and offer up to $5 million in funding.
- Decathlon Capital Partners: Decathlon Capital Partners provides RBF funding to companies with annual revenue between $2 million and $50 million. They offer funding up to $30 million and have flexible repayment terms.
Revenue-based financing is an alternative financing option for small businesses in 2023 that offers flexible repayment terms and does not require the business to give up equity.
Lighter Capital, Kapitus, Bigfoot Capital, and Decathlon Capital Partners are some of the best RBF services available for small businesses in 2023.
There are several small business financing methods to take into account in 2023 and even though I only touched on five of them in this post, the rest will be talked about in subsequent posts in the future, hence, the “Part”.
Hopefully, this has been useful so far for anyone seeking alternative financial methods to get their small businesses up and running.
As we all know quick access to capital is extremely important for any business growth from whatever level they may be operating in.