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Alternative Funding Makes Banks Look Foolish

01.24.2014
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If you have a small business, funding can be a challenge. Since the boom of Internet businesses over the last decades, there has been a surge in some creative financing options that have appeared on the financial scene. Not all are appropriate for everyone, but there are choices. If you are looking to learn about non-traditional ways you can fund your small business, you are in luck. There are many!

  • What is meant by the term “Alternative Funding” options?  This term refers to financing or funding options that are not “traditional”.  In other words, not from a bank per se nor from a business owner’s own personal assets; the way most people fund their small business. Alternative funding options allow for small business to get the money they need today, usually with lower interest rates. For investors, the risk may be higher, but so is the return. Since traditional banks are not in the picture, there is often less regulatory red tape to deal with, and borrowers who have poor credit have a better chance at getting funded.
  • What is Peer to Peer Funding?  This is a personal loan that you take from another individual, usually with lower interests rates than a bank. People who have money to lend try to make money by lending it to people who need it. But beware. People with money never just give it away for nothing in return. So do not expect any charity. Private lenders are filling a need and they want to be compensated for the risks they take. But if Peer-to-Peer funding suits you, it can be a great option.
  • What is Invoice Trading? This is also called “factoring”. A business sells some of its invoices (accounts receivables) to an investor (a factor). The factor pays about 70% of the amount of the invoice and then proceeds to collect on the invoice from the customer. This way, the business gets  money right away, dependably and the factor earns about .30 return on each dollar loaned.If the customer does not pay the invoice on time, then the factor pays the business and then collects on the invoice themselves. This way, businesses have a steady flow of income.
  • What is Crowd Funding? This is just a new name for something that companies have been doing for eons. But with the Internet, it is easier to connect with people and so we are hearing about it more. In short, the idea is that many people either donate to, or invest in a business. There are many different spins on crowd funding. The individual can make a donation, get something in return, or make an investment.
  • What are Debt Securities?  In this type of funding situation, a creditor gives money or assists to the borrower with the intention of being paid back. There is a contract of some kind that details the arrangement of money borrowed and owed. These contracts can then be traded, so that they represent a further way to make money for the lender. Debt securities are vital to the overall economy.
  • How Does Lawsuit Funding Work? In the case where you have been sued personally or as a business, companies exist who will give you a large payout of what you won in court versus you waiting for installments.  Typically these companies buy your settlement at a specific percentage (e.g. 80%) and give you that money up-front.  They then collect the installments you would have received instead.  This way you get the money you need from your lawsuit and they make a nice return over time.

There are several viable alternative ways to get money for your small business. To determine which is the best way will depend  much on the kind of business you have; size, sector, non-profit, attractiveness, novelty etc. If the best way is selected, it can turn out to be a classic Win Win situation. Like any financial decision, research and careful consideration are imperative. Be circumspect. You do not want to get involved in the wrong type of funding that will impair your business down the line.

Published at DZone with permission of Paul Andrews, author and DZone MVB.

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