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How to Obtain Alternative Business Finance for Small Businesses

How to Obtain Alternative Business Finance for Small Businesses

The inability of small business owners to obtain business loans is well documented. Why banks won’t lend and the plight of ailing small business owners consequently are topics well covered in the financial news media. But whilst the bank managers, politicians and those in high places work out a way to resolve this core issue, what small business owners need to know in the interim, are other funding alternatives to help bridge their finance gap.

Without the knowledge of alternative forms of business finance, many small businesses have in desperation resorted to payday loans which carry extremely high rates of interest and are therefore expensive forms of finance. Payday loans are not designed to be a source of business finance and their continued use is simply unsustainable for small businesses.

But what are some other sources of business finance accessible to small businesses? These are in fact a number of avenues to be explored, and these are often known as quasi-commercial finance organisations. One example of this type of lending is micro-credit finance. Micro-credit lenders provide business loans to those who are in some way ‘socially excluded’ in order to help them start up their business or become self-employed. These are typically very small loans given to those considered impoverished. Some micro-credit providers may also enter into partnership with other funding organisations to form a syndicate to provide financial support. Micro-credit lenders also offer a mentoring scheme.

Peer-to-peer funding is another option, and basically refers to those who lend money to unrelated individuals through peer-to-peer lending companies’ websites. These business loans are typically unsecured and the interest rate charged would depend on the assessment of the borrower’s risk of default. This form of lending is relatively new and takes place online. Peer-to-peer lending companies’ have various credit checking tools and this form of lending is conducted with a view of profit making for the lenders and the intermediary.

Crowd funding, or crowd financing, can also be an alternative source of funding for small businesses, especially start-ups. The basic concept is to obtain many small contributions in order to finance a particular project. Crowdfunding intermediaries can bring together those able to contribute and those requiring access to funds.

Then there are mutual support groups, which often take the form of business credit unions or mutual guarantee societies. The idea behind similar businesses forming such a group is that members within the group can have access to cheaper finance, or act as guarantors for each other.

If the small business owner is willing to forgo a stake in their business in exchange for financial support, venture capital can also be an option. Venture capitalists often provide management support or other expertise in addition to financial support.

Finally, there are other lesser known funding sources which include social banks, who lend to those able to demonstrate a clear social or environment objective; and other organisations who only lend to cooperative or community based enterprises.

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