An alternative funder provides funds to finance your business outside of the traditional banking process. This type of financing is different from traditional financing through bank channels and the sale of equity.
Sometimes, it can be difficult to raise finance through traditional sources. It’s times like that when alternate finance sources can be a useful option.
Alternative Funder Options Include
- Merchant Cash Advance – MCA
- Private Equity
- Venture Capital
- Peer to Peer Lending
- Asset Finance
1. Merchant cash advance – (MCA)
It’s one of the well-known sources to raise via non-traditional financing. It’s about getting an advance against commitment to pay the loan from the future revenue stream.
This method was introduced to finance small businesses that primarily earn revenue via debit and credit cards. However, this financing facility has been extended to include businesses that do not rely on credit/debit card as a source of finance.
By opting for MCA, an alternative funder option, you get an upfront payment that can be repaid with the following two methods.
- A fixed percentage is paid from future revenue earned by the business. For instance, lenders and borrowers may agree to repay 10% of each month’s sales.
- A fixed amount is to be paid back for each period. It’s like a fixed debit made from the bank account in each accounting period. This practice is also known as Automated Clearing House or ACH.
It’s important to note that repayment of the loan includes commission and fee for the advance. It’s equally important to note that a fee is charged until the advance balance is fully repaid to the lender of funds. Further, the pricing of the loan is set in factors.
For instance, it can be 1.2, 1.5, or any other pre-agreed factor between lenders and the business borrowed advance.
Benefits of MCA
- Quick financing.
- No risk for credit rating.
- No fixed payments – (only pay if you earn revenue).
- Business is free to use money anywhere they want.
2. Private Equity (PE)
Private equity refers to raising finance from private investors. It’s an option for the companies and businesses that are not listed on the stock exchange and intend to raise finance by selling some portion of their business.
Private equity firms facilitate such financing transactions and charge a management fee. However, it’s important to note that only qualified and accredited investors can invest in PE. These investors include financial institutions and individuals with higher net worth.
3. Venture Capital
Another form of alternative funder. It’s a form of private equity financing. It involves investing in businesses with higher risk.
The high-risk businesses include startups, early-stage businesses, and emerging companies with higher potential to grow and generate profit.
However, these companies and businesses are at the start and contain higher inherent risk. Usually, these businesses fall in areas of information technology, biotech, and some innovative products with a massive potential to grow and expand.
As there is a higher risk in investment, the investors expect a higher return with a larger share in the business.
Crowdfunding is about raising small amounts of capital from a larger number of individuals. It helps to easily access a large amount of finance by using social media platforms and websites that connect businesses and investors.
It helps business in different ways that include,
- It can be a marketing buzz for your business.
- Helps in business revenue growth.
- It helps to test public reaction to your business/products.
5. Peer To Peer Lending (P-P)
Peer-to-peer lending is about raising finance from other individuals. That’s why it’s also called social lending, and it does not involve financial institutions in between the approval and execution of the transaction.
The motivation behind peer-to-peer lender is a higher return than earned by investing in savings accounts, treasury bonds, etc.
Bootstrapping is when the business is started with the personal money of an investor. The entrepreneur does not rely on external finance sources. Instead, its growth is dependent on internal business operations.
The advantage of such an approach is that there is no control dilution or external influence on the decision-making. However, the growth comes at a very low pace and is highly dependent on the operational performance of the business.
7. Asset Finance
This practice involves raising finance by providing company assets as security. It’s considered a safe and secured way to raise the finance for meeting the working capital needs of your business. However, the business must own assets to raise this type of financing.
The assets to be given as security may include but are not limited to machinery, inventory, equipment, and other business assets.
So, which option of financing is better?
Different financing options can be desirable in a different situation. For instance, some businesses might have massive asset portfolios. Hence, it may be viable for them to opt for asset financing and vice versa.
Generally, we recommend MCA as one of the better financing options. The reason is that it’s quick, flexible, easily available, easy to understand, easy to execute and repay. The borrower does not need to worry about control aspects and financial leverage. Instead, repayment is only made as revenue is generated by the business.
Alternative funders provide non-traditional financing to businesses and startups. It’s about finding different ways to access funds other than opting for a bank loan and raising money through the stock exchange.
Different sources of non-traditional financing include but are not limited to a merchant cash advance, private equity, venture capital, crowdfunding, peer-to-peer lending, bootstrapping, assets financing etc.
However, we recommend merchant cash advance as one of the most convenient financing options. It’s because MCA is quick, flexible, does not impact the credit rating, and repayment is dependent on the revenue generated in the future.
Further, if you need a customized opinion from an industry expert to make a decision. In that case, we can offer extensive help to decide if you should opt to raise finance and which of the financing methods should be opted.