Capital is critical to run a successful small business. You can use small loans borrowed from family members to start a business, but eventually, you’ll need institutional capital to scale the business. Essentially, businesses require significant cash infusion during the startup and growth phases. Sourcing loans from banks and credit unions can be frustrating and daunting, especially if you have a poor credit score.
Worse still, unrealistic repayment terms could impair your company’s growth for a long time. While alternative financing methods for small businesses are numerous, you have to choose an option that’s right for your business. This article outlines the different types of alternative financing for small businesses.
1. Private Loans
The term private money loan refers to a loan obtained from a private investor. Borrowers receive private money loans without going through the traditional criteria of conventional lending institutions. Like a hard money loan, a private money loan comes with some level of freedom and versatility. However, the hard money lender or private money lender may charge you a higher interest rate compared to rates offered by a traditional lender. Sometimes, the high-interest rate stems from businesses with high yield potential.
The downside to private lending is that it poses a significant risk to both the lender and borrower. To mitigate the risk of default, the private lender may check the borrower’s credit score to determine their creditworthiness. Most times, lenders conduct background checks and to confirm the integrity of the information provided by the borrower.
Similarly, private money borrowers must verify the source of wealth of the lender before accepting any loans. Making sure that money is legitimate helps mitigate being complicit in illegal business ventures in future lawsuits.
2. Peer-to-Peer (P2P) Lending
Otherwise known as crowdlending or social lending, peer-to-peer (P2P) lending enables business owners to obtain financing directly from other individuals. This alternative financing method is rapidly becoming popular for raising quick cash for a business. Many P2P lending websites connect borrowers directly to lenders. The websites set their rates and terms according to their specification.
Business owners also use cryptocurrency exchanges for peer-to-peer lending as it helps save money on transaction fees using traditional channels. The cryptocurrency market is rapidly evolving to take over the financial space. So, you can consider using a crypto exchange to receive money from members of your social network.
If you’re still not sold on crypto exchanges, check out the Coinsquare review to get answers to all the questions you may have. Coinsquare is the number one crypto exchange for Canadian cryptocurrency users, who get to fund their accounts using Interac e-Transfer, direct bank deposit, or wire transfer.
Coinsquare was initially a bitcoin exchange, but it has evolved to feature different cryptocurrencies, including Ethereum, Bitcoin Cash, Litecoin, Ripple, Dogecoin, altcoin, and DASH. You can also trade using the Advanced Trade mobile app. Keep in mind that there are trading fees which you might have to pay. The fees often vary depending on the trading platform you choose.
3. Investment Crowdfunding
Investment crowdfunding is a viable alternative financing method that involves getting investors to invest a considerable amount of money into a business. In exchange, the investors are granted equity shares in the company. Investment crowdfunding is exclusively reserved for accredited investors.
Aside from obtaining equity stakes, investors can invest in a small piece of a sizable loan. In return, they receive a high-interest rate due to the credit risk associated with the borrower. To mitigate losses, the lender should know what the loan is meant for and the terms.
Entrepreneurs can also leverage investment crowdfunding to source seed money to start a new business venture. The best part about granting the investors equity ownership is that they bear all the risks. If the business fails, you are not liable to indemnify them.