The role of small and medium businesses (SMBs) in building the economy is often underestimated. However, they are the foundation for large corporations, which are not able to fill up all niches on the market. Unfortunately, this underestimation leads to the fact that small business owners lack financial support.
Why Banks Neglect SMBs
Back in the old days, banks were the only legal source of money for a venture. You as a packed-with-ideas entrepreneur had to roam from one bank branch to another with a hope to get a loan approved. And if it was, the interest rate was most probably immense.
The reason for such banks’ disregard lies in small loan requests. When you need more than $100K for your venture, you are welcome to the office. But small business owners usually need fewer amounts that make them unattractive in the bank officers’ eyes. Besides, you should comply with miscellaneous stringent borrowing requirements including positive credit score, collateral availability, zero indebtedness, detailed business plan, and others to get a chance for loan approval. Can you imagine how much time it may take? In addition to these drawbacks, mind that you voluntarily get in financial cabala upon your loan request approval.
Fortunately, these days are gone, and global digitalization gave birth to numerous legal alternative borrowing sources.
You’ve probably heard about fintech development and companies that offer financial software development services. In some sense, they aim at building a better world where every small entrepreneur will have a chance to realize their own endeavors. Banks are no longer the option, so, let’s focus on alternative lenders.
When you opt for such solutions as Fundera or MoneyPlace, you may not worry about complex qualification procedure or long waiting period. Alternative lenders allow you to get funding fast and without unnecessary hassles. Moreover, a raised demand for numerous fintech lending options induced banks to join hands with them to strengthen positions on the market.
With that in mind, we are ready to get into the ecosystem of alternative borrowing and find out more about the types of lenders, their work, differences, peculiarities, as well as examples to consider.
Let’s begin with the most famous lending option – peer-to-peer or P2P. It means that you as an individual can borrow funds from other individuals at a certain interest rate. Some services allow you to get unsecured loans up to $70K! By the way, APR (annual percentage rate) usually depends on the amount and term you choose. P2P lending options are mostly region-based. For example, MoneyPlace is not a fit for non-Australian residents. Nevertheless, you have a bunch of other lenders available including Zopa (UK), Harmoney (New Zealand), Borrowell (Canada), Smava (Germany), Upstart (US), etc.
Unlike P2P, business-to-business (B2B) lending is the most appropriate borrowing option for SMBs. Online investors are ready to provide you with funding for purchasing equipment, hiring new employees, debt consolidation, business expansion, and other needs. The qualification procedure is much easier and time-saving compared to the paperwork you have to accomplish with banks. In fact, each service has their own qualification terms including the period in business, annual/monthly turnover, active debts, etc. This information is decisive for not only approval but the interest rate as well. Most online lenders provide the verdict within 24 hours. A threshold amount differs depending on the service you choose. For example, LendingClub limits your request with $300K and Funding Circle raises the ante to $500K. Other solutions that small business owners may find interesting include Fundera, Prospa, OnDeck, and so on.
Everyone knows Kickstarter – a world-known platform, where enthusiasts can find support for their projects. Rockethub, TechMoola, Indiegogo, and others form an ecosystem of reward-based crowdfunding. This type of alternative lenders provides SMBs with an opportunity to raise funds from individuals in return for some reward (product, service or even a simple “Thank you” note). All you need is describe your business idea and set your goal. If you manage to win the community’s attention and interest, donations will teem to you. Mind that crowdfunding platforms usually charge a rate for their services. However, this lender option is considered one of the cheapest to attract funds.
According to the title, this crowdfunding option requires more than a simple reward to your donors. If you opt for raising capital with this lending solution, be prepared to share your company equity (shares, ownership ratio) with investors.
Equity crowdfunding is a new vision of investment process where not only wealthy investors but also “the crowd” can financially support a startup or venture. If interested, check for AppsFunder, MicroVentures, OurCrowd, and other fintech solutions to sustain your business.
Reward-based and donation-based crowdfunding is often muddled up. However, the latter is a newer stream in investment ecosystem that foresees no material or financial rewards to donors. As a rule, charitable, medical, corporate philanthropy, and socially-oriented projects suit this way of fundraising. So, if your business is somehow associated with supporting or facilitating the life of society, feel free to experience FundRazr, GiveForward, Rally, and other donation-based services to attract capital.
Microfinance or Community Shares
Banks usually reject any endeavors associated with microfinancing. However, this niche is in high demand for small-scale farmers, low-income entrepreneurs, and miscellaneous small business owners. Being unbanked is no longer a verdict but an opportunity to find investment in specialized microfinance organizations. Local communities do not also stand apart and actively participate in empowering small-and-medium-sized companies, as well as specific communities, at a local level. These alternative lenders including Accion, Kiva, 51Give, Grameen America, and others focus on building a society with affordable financial services for everyone.
Selling invoices is an innovative solution in the lending market. In short, your company can sell outstanding invoices on the online platform and get cash within a day or two. Invoice trading is especially beneficial for SMBs that sell goods/services on credit. For example, you can sell a $50K invoice for over $47K within 24 hours or so. You win time because you do not have to wait for the invoice due date. Invoice trading platforms like MarketInvoice, TransCapital, VeloTrade, and others act as intermediary and charge fees for their services.