The Ins and Outs of Alternative Financing

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After the recent financial crisis, traditional banks are more reluctant than ever to fund small businesses. Entrepreneurs need not be discouraged though, as a new trend has emerged in the world of finance: “alternative lending.” What exactly is alternative lending and is it right for your business? Here are some resources to help demystify the latest options in small business financing.

“Alternative Lending” Defined

You may walk through open doors of your local bank only to hit a brick wall. According to this Alternative Lending e-guide, traditional banks decline up to 80% of small business loan applications.

Enter the “alternative lenders,” aka non-bank lenders. With faster underwriting and shorter decision processes, alternative funders have grown increasingly popular. They lent approximately $3 billion in 2013, double the amount from 2012. Banks tend not to loan amounts less than $200,000, so alternative financing appeals to small business owners in need of smaller loans.

Types of alternative funding include term loans, merchant cash advances, factoring and equipment loans, and you can apply for alternative financing online.

Beyond Brick-and-Mortar Banks

It seems like you can find everything online, even money for your small business. In the SCORE online workshop, “An Insider's View: Securing Capital to Grow Your Business,” Ty Kiisel, Contributing Editor at OnDeck, explores these new financial options in depth.

Applying for online business loans requires less paperwork with a shorter wait period. You can often learn your fate in five minutes and receive funding in 24 to 48 hours. However, interest rates are often higher than those of traditional bank loans.

Sources of online financing include:

  • Non-profit lenders
  • Invoice financing
  • Online business loans
  • Loan matching sites or aggregators
  • Crowdfunding

Get the Crowd Behind You

Another buzzword has hit the world of financing: “crowdfunding.” This is the funding of a business or project by raising money from a large number of people. Individuals can commit as little as $5 and receive a reward for their donation. Kickstarter and IndieGoGo are popular options, but the list of crowdfunding websites grows every day.

In the SCORE Small Business Success podcast on Crowdfunding, Maryann O’Neil and John Montelione, co-founders of a crowdfunding website called MsGenuity, detail the process. They explain the two types:

  • Reward based crowdfunding: A person contributes money and receives a reward in exchange
  • Equity based crowdfunding: A person contributes to become an investor of the business

Why is crowdfunding so popular now? The great recession and high unemployment rates inspired the Jobs Act of 2012. The new law encourages small business financing by relaxing securities regulation so entrepreneurs can raise money from the public.

Alternative financing may seem like the perfect answer for a small business owner, but every loan comes with risks. A SCORE mentor can help weed through your financing options, so you can decide what’s best for your small business; get connected today.

This post originally appeared on the Bridget Weston Pollack is the Vice President of Marketing and Communications at the SCORE Association.