Using Alternative Lending for your Small Business
One of the many difficulties associated with starting a small business is financing. While most businesses go the traditional route of securing bank loans, there are many cases where this isn’t ideal or even possible. In these cases, alternative lending sources may provide the best options to get your business up and running.
What are private funding sources?
Private funding sources are lending institutions and individual investors who provide various types of loans as alternatives to traditional bank loans. These may be venture capitalists looking to invest in exchange for ownership or equity, or angel investors who could be mentors or private investors who believe in your company’s strategy and goals.
There are several potential advantages to securing funding through alternative lending sources. First, the approval process is typically much quicker than it would be with a traditional bank loan. Private funders aren’t subject to the same regulations as banks, and they can make their decisions more quickly.
They also evaluate their potential investment differently. A bank has rigid guidelines for credit-worthiness and collateral. Alternative lenders will each look at a business differently. An investor who is in your businesses line already may see something that appeals to them which a bank might overlook. They are willing to take additional risks.
Those risks, however, come with a price. The primary disadvantage of alternative lending is cost. Rates are almost always higher, and the term of repayment may be quicker than it would be with a traditional bank loan.
Where to find private funding
For those who find alternative lending appealing, a major question might be how to find interested lenders. The answer generally comes down to who you know, or who your associates know. The basis for finding a like-minded private funder is networking. This is why the sources are often in-industry, successful retired owners or managers, or mentors looking to branch out.
How to decide
Entrepreneurs must carefully weigh the upsides of fast cash vs. traditional bank guidelines. For many, the uniformity of a bank loan may be appealing. But for others, especially those with credit scores that banks might not consider, or those who have an opportunity that requires them to move quickly, alternative lending may be the way to go. Before deciding between the two, be sure to objectively evaluate the pros and cons and take an honest inventory of your business model and strategy.