Why Small Business Owners Are Using Alternative Financing
Small businesses crop up every day. Whether it’s the upcoming next big startup in the tech world or the newest trend of pop-up boutiques, small business is thriving in a way not seen since the birth of American consumerism. However, traditional banks are often wary of providing capital to these small businesses to help them thrive. In fact, even mid-size and large businesses have had trouble financing ventures since the tightening of the economic belt. For this reason, all types of businesses are turning to alternative financing, but small businesses may benefit most of all.
Traditional vs. Alternate
Traditional financing involves going to a financial institution, filing out an application, providing asset and income information, and pulling a credit report, hoping that based on all these factors, capital will be lent for a specific period of time with the expectation that it will be paid back with interest. Many small businesses run into issues with this type of financing because they do not yet have enough established income or credit to qualify, and even if they do, the amount may not be enough to cover all expenses, or have such a high interest rate that they would immediately flounder. The flip side of this is that banks may offer the borrower more than needed for the loan, causing them to flounder because of not being able to afford the loan.
Alternative financing, however, provides many of the things that small business owners may need. First and foremost, many alternative finance options do not have a stringent application process. Secondly, many options offer to work with collateral, be it inventory, equipment, or other assets in exchange financing. While it’s true that many alternative funding options also charge a high interest rates, they also pave the way for small business owners to establish greater credibility in a shorter amount of time and are also not as stringent in their lending practices, meaning as long as the funds are used for business purposes, the owners are not pigeonholed into how to allocate the money and can borrow only what they need instead of a prescribed minimum.
Risk vs. Reward
Every business venture involves some potential risk. One of the largest risks that small business owners have is failure. What happens when the business doesn’t succeed? This is a question that every business owner has to ask of him or herself, regardless of whether financing is involved. However, if financing is used, business owners should be aware of their liability. This is especially true in the world of alternative financing. However, the rewards of a business doing well should far outweigh the risk.