Alternative Business Funding vs. Traditional Bank Financing

David NayorSmall Business Lending

Most business owners and entrepreneurs need funding to operate. Whether, as a start up,  that money is needed for the initial equipment and business space, or it goes toward growing an established business, the financing has to come from somewhere, and the amount needed is usually greater than personal credit cards will allow. In these cases, the small business owner needs to decide whether to go to a bank for an SBA loan or a conventional loan, or to seek out alternative forms of funding. In order to reduce the confusion and make your decision easier, we are going to lay out some of the pros and cons of both traditional banking loans and alternative funding.

alternative business funding

 

Lending Requirements

  • Banks – In order to secure financing from a bank, a business owner has to show a strong historical or projected cash flow, and a good credit score. Banks also look for assets and collateral currently owned by the business to be used to reduce the risk assumed by the bank when lending money. Alternative Funding – Many forms of alternative funding do not necessarily require the business to have an well established financial history. However, because alternative funding is considered short-term financing where the lender assumes most of the risk, the interest rates are generally higher than bank loans.

 

Payment Terms & Interest

  • Banks – While alternative funding is considered short-term financing, traditional banking loan payments can be spread out over several years. This usually eases the financial strain on business owners and accounts for any dry spells in business that a company might experience.
  • Alternative Funding – Many forms of alternative funding do have higher interest rates due to risk assumption on the part of the lender, and they also have a smaller window for repayment. However, there are alternative funding options that are tied to things such as a percentage of credit card sales, which have payment windows of five and even ten years, but these do come with a high cost of borrowing.

 

Application Process

  • Banks – Traditional bank financing is very secure with a large payment window, but the application process can be very lengthy – requiring business owners to show detailed financial statements, a thorough business plan, a projection of sales for the next year, and a host of other data. Once the application is in, then there is an approval period, and another span of time before funds are disbursed for use by the business.
  • Alternative Funding – Alternative forms of business funding often have very quick turnaround times. From the time a business puts in an application, the funds can sometimes be made available within 48 hours of approval. This can be a big benefit for newer businesses that need immediate money to cover their operations.

 

 

Talk To An Expert

No matter if you are an established small business looking to grow your operations, or if you are just starting out and need funding to get your company off the ground, there are numerous financing options available – from both banks and non-traditional lenders. The best thing you can do is talk with a financial or small business expert at BoeFly to see what options are available to you, and which methods would best fit what you want to accomplish.