Last Updated: Oct 20, 2022

Small Business Financing Options That Bypass Traditional Banks

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Starting your own company is not an easy task and it’s not for the weak willed people. But the most crucial element in starting a business is not a business plan, but suitable financing. Having a poor credit is another obstacle for your to get a business loan. But there’s something you can do about it and that is getting a business loan from alternative sources.

Find out how to finance your startup without a traditional bank in this article.

Table of Contents

• Why is it Difficult for Small Businesses to Get Loans from Banks?
• What is Alternative Financing?
• Why Might Small Businesses Seek Alternative Financing?
• Business Financing Options Without a Traditional Bank
• Community Development Finance Institutions
• Partner Financing
• Angel Investors
• Invoice Financing or Factoring
• Crowdfunding
• Grants
• Peer-to-Peer or Marketplace Lending
• Convertible Debt
• Merchant Cash Advances
• Microloans
• The Benefits of Alternative Lending

Why is it Difficult for Small Businesses to Get Loans from Banks?
It’s unfortunate that small businesses are the ones that have the most difficult time acquiring business capital. You would think that banks and other financial institutions would be crazy to drive away potential customers like small businesses, right? Well, yes and no, but it has to do more with the bank requirements than customer acquisition. Banks typically require small businesses to have at least a five-year profile of a healthy business (for instance, five years of tax data) before extending an offer.

What is Alternative Financing?
Thanks to the internet and modern methods of lending money, which is called alternative financing, business owners can apply for a business loan that’s less complicated than what traditional banks offer. Crowdfunding, online loan providers and cryptocurrency are among the examples of alternative financing (most of them are based online).

Why Might Small Businesses Seek Alternative Financing?
Perhaps the most common reasons why small business owners would prefer to seek alternative financing over traditional banks are, because they’re easier to qualify, they have fewer credit requirements and they usually have fast approval times. Not all small business owners meet the complicated requirements to apply and be approved for traditional loans. Traditional lenders also require applicants to have a minimum of 600 – 650 points in their credit scores. These requirements will make business owners even more desperate at a time when they need the money most.

Business Financing Options Without a Traditional Bank
If you’re a small business owner and are facing with similar predicament, then it’s time for you to consider getting a business loan outside the traditional circles. We’ve listed 11 alternative financing options for you to look at.

1. Community Development Finance Institutions
More and more nonprofit community development finance institutions (CDFIs) are popping up now across the UK and they’re often driven by the need to help individuals in their community who either does not have the necessary finances to start their business, or don’t have good credit score to get business loans from traditional sources. Unlike traditional banks, these CDFIs look beyond people’s credit scores and determine whether their business idea is reasonable or not. If it is, then there’s usually few requirements to satisfy in order to get a loan from them.

3. Partner Financing
Partner financing is the ability to work out a deal with a “partner,” who are usually your friends, family, shareholders, other people you know and traditional and non-traditional sources of capital in a partnership, for funding your enterprise. Your agreement with this partner/partners will be them providing you the necessary funding for your startup business in exchange for special access to your product, staff, distribution rights, ultimate sale or some combination of those items. It’s similar to traditional loans, except this one has no interest and your partners gets a significant portion of your company shares – they ultimately become your board of directors/investors.

4. Angel Investors
An angel investor is usually just a single individual with enough funds to invest in a small business and often they tend to invest in startups, because they know its growth potential. They are not the same as venture capitalists (VCs) because VCs can sometimes be a group of people or even a company, and VCs often require a business that’s applying for a loan to have a stable growth and must already be at least 5 years in the market. You can find plenty of angel investor sites on Google.

5. Invoice Financing or Factoring
Invoice financing is an accounting method that lets businesses borrow against their accounts receivable to generate cash quickly. With invoice financing, a company uses an invoice or invoices as collateral to get a loan from a financing company. This type of financing is very useful for business with a lot of purchase orders coming in, but don’t have enough money to buy new materials. It essentially allow companies to close the pay gap between billed work and payments to suppliers and contractors.

6. Crowdfunding
Some startups need no more than £270,000 to launch their business and if your business idea fits the bill, then all you need to start your small business is a crowdfunding platform like Kickstarter and Indiegogo. These sites can provide you as much as £500,000 for your business capital, but the downside is that it takes time to collect such amounts, so you’re going to have to learn to be patient if you want to succeed.

7. Grants
If your startup is based on science or research, then you can apply for UK government funding for small businesses. There are government facilities all over the UK to assist you in getting the funding you need. Be sure that you meet all the requirements when you apply for the grant.

8. Peer-to-Peer or Marketplace Lending
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Assetz Capital and Lending Works are two of the most notable P2P lending platforms in the UK. The best thing about P2P lending is that it’s easily accessible to small business owners and they can find the best lenders that suits their needs.

9. Convertible Debt
Convertible debt is a type of business loan that lets the business owner borrow money from an investor or group of investors and both parties agree to have the debt be converted into equity in the future. If you’re a startup business you can definitely take advantage of this kind of loan, especially if in your tenure you show good track record in sales and your product or service is bringing in huge profits. Another additional benefit you’ll get is more investors with solid finances to back up your business for the foreseeable future.

10. Merchant Cash Advances
Some 66% of small businesses face financial challenges; 43% say the biggest challenge is paying operating expenses. Merchant Cash Advances (MCA) is a good option for a startup such as yours, because the loan amount is not too big for you to repay it and you can repay it in small amounts monthly with an added interest. For example, you need £70,000 in cash immediately to cover some equipment acquisition fees and the merchant offers you a lump sump amount equivalent to, or in some cases, a little bit more than what you need. You can pay this amount for, say, 6 months on top of a £1,500 interest, which would be £11,700 (+ £250 for the interest) every month. Not bad if you’re making twice or three times that amount of sales each month! The best thing about MCAs is that you don’t need any assets, like inventory or property, to get funding.

11. Microloans
Microloans or sometimes referred to as microlending or microfinancing are smaller loans compared to business loans from traditional banks that are offered to business owners who have little to no collateral. UK Aid Match and Lend With Care are just a few examples of microfinancing companies in the UK and if you’re a startup, then you are most likely eligible for this type of loan. They typically cover operational costs and working capital for equipment, furniture and supplies.

The Benefits of Alternative Lending
You can actually make arrangements to secure loans from multiple alternative sources like the ones mentioned above, but just make sure you can repay them. This translates to more financing secured for your business to thrive and even consider expanding your business.

Below are some other benefits of working with a nontraditional lender:

Market Credibility – when you borrow money from already established investors and the terms of your agreement is them getting equity shares from your company, you add credibility to your brand.

Infrastructure Help – your investor business partners (assuming they’re already an established company) will most likely have teams for marketing, IT, finance and HR. All these teams can come in handy and you don’t need to hire more people to fill in the roles for your company.

Overall Business Guidance – the fact that your strategic partner (investors) is already established means they have a lot of business insights to share with you besides financial assistance. They can help you avoid costly mistakes and prop up your business in the long run since they also have a vested interest in it.

Relatively Hands-off Partnership – it is highly likely that your strategic partner also has their own business to attend to, so they may not meddle in your business as much, except for a few monthly or quarterly updates.