Small Business Financing Options: Bootstrapping Or Alternative Funding Sources?
Simply put, alternative funding for a business is getting finance from other sources other than traditional bank loans in order to get capital into the business. These funds and loans are placed aside specifically for entrepreneurs and small companies. In most cases, they also provide more attractive terms and even less stringent penalties that may be more beneficial to upstart startups. While there are both commercial banks and credit unions that funding a business, they are not the only means by which an entrepreneur can obtain funds.
Most traditional bank loans are obtained through the use of a traditional business credit score system. This credit score system is based primarily on the amount of collateral that the entrepreneur has secured with his or her business. If the entrepreneur’s business fails to meet its obligations, then the lender will lose the collateral. As you can see, this type of finance does not involve as much collateral or greater risks to the investor. There are many entrepreneurs that have used this method of alternative funding, however. It is not a sure thing, but it can also provide investors with more capital to assist a startup enterprise with their business ventures.
Another type of alternative funding that many private investors and venture capitalists have been able to obtain is capital from the Small Business Administration. This government agency provides small businesses with loans at affordable interest rates in order to help them with start-up expenses Alternative funding. These start-up expenses often include office furniture, software, marketing, and payroll. The SBA was created by Congress in 1953 in order to help promote small businesses. Its mission is to assist small business owners achieve their goals through providing them with the tools they need to succeed.
One of the ways that investors obtain alternative financing is through the Small Business Administration. Here’s how it works: when a business applies for traditional bank loans, the typical requirements that they must meet include credit history, income, and a solid business plan. If an investor meets these requirements, then he or she is considered a good risk to the lender. This means the potential borrower will probably pay off the loan on time and the lender will make a decent profit back on the investment. However, if the entrepreneur makes any mistakes, then the lender may be forced to foreclose on the property.
However, the SBA offers alternative financing that doesn’t require good credit to secure it. In fact, there are many businesses that don’t even meet the criteria for traditional bank loans. When they do, the SBA can provide them with working capital loans at reasonable interest rates. This type of financing is much more affordable than traditional bank loans because working capital loans are interest free and do not require any collateral. In fact, many investors use working capital loans for their primary debt.
The downside to alternative funding is that you usually have to wait a little longer to get the money you need. This is because the process of collecting payments from your clients takes longer. Additionally, you may not receive the full amount you are owed on time if you use this type of funding method. This is because in order to process an alternative funding loan, the lender typically has to take the time to go through the collection process with your clients.
Some may consider this type of funding to be better than traditional sources of funding because it is a faster process. As stated above, working capital loans from the SBA take longer to process. This means an investor will usually pay off the loan more quickly compared to a traditional loan. For an entrepreneur who is looking to start up or grow his or her business, this can be a huge advantage.
However, even with the alternative funding process, some businesses will still need to rely on traditional loans in order to grow or expand. Traditional loans are often the only option for new and small businesses because they have higher funding requirements. Bootstrapping businesses rely on small loans from local banks and private lenders as their primary way of receiving funds. Because these loans are obtained at higher interest rates, they are often used as an emergency source of funds.