The Pros And Cons Of Traditional And Alternative Business Funding
The Pros And Cons Of Traditional And Alternative Business Funding
Many small-to-medium businesses (SMBs) face challenges in securing the funds they need to grow. With small businesses making up 99% of all U.S. companies and employing millions, access to capital is truly important. This article explains the pros and cons of traditional and alternative business funding, helping you understand which option might work best for your business.
Understanding the Business Funding Landscape
Access to sufficient capital is a major concern for many business owners.
According to various reports, only 14.6% of loan applications from SMBs are approved by big banks. This means that 85.4% of these applications get denied, leaving many business owners searching for other funding alternatives.
Cash flow challenges and limited working capital can slow down growth and even threaten the survival of promising businesses.
It is important for business owners to familiarize themselves with both traditional and alternative funding options. Each approach comes with its benefits and drawbacks, and the right choice depends on your company's financial situation and long-term goals.
Traditional Business Funding
Traditional funding typically means getting funds from established financial institutions like banks or credit unions. This path has been the go-to option for many SMBs over the years.
Pros:
Lower interest rates are a common feature of traditional loans, making the cost of borrowing relatively affordable.
These loans often come with structured repayment plans that can assist in better financial planning.
Cons:
Approval rates are extremely low. With only 14.6% of small to medium sized business loans approved by big banks many business owners find themselves between a "rock and a hard place" and don't know what to do.
Big banks require extensive documentation, collateral, and a strong credit history, which many SMBs struggle to provide.
Alternative Business Funding
Alternative funding includes several options such as non-secured loans, interest free financing, SBA loans, invoice financing, lines of credit, term loans, commercial or investor real estate loans, and merchant cash advances. These options have become popular because they offer a faster and more flexible approach to finance.
Pros:
Approval rates are typically higher than traditional bank approvals because alternative lenders have more flexible qualifying criteria.
They typically have faster application and approval processes, which helps when you need funds quickly.
A range of products are available to suit different business needs, from managing cash flow to financing specific projects.
Cons:
The costs can be higher compared to traditional bank loans. However, if your bank says no.....you'll still need financing options beyond the bank to keep your business running smoothly.
Choosing the Best Option For Your Business
Determining which funding option is right for your business depends on various factors, including your financial health, how quickly you need funds, and what you plan to use them for. Traditional loans work well if you have stable revenue and a solid credit history, while alternative options may be better if you need faster access to money and can handle potentially higher costs.
Many Business owners have opted for alternative funding options (when they needed cash quickly, in order to, for example... take on a new purchase order) because their traditional bank was taking too long to process their loan application.
It is a good idea to consult with financial advisors or trusted resources. They can help assess your options and determine the best fit for your needs. Moreover, gathering all necessary documentation in advance improves your chance of securing funding by demonstrating your organization’s credibility and preparedness.
If you are exploring ways to finance your small business, start by researching both traditional and alternative funding options. Evaluate your business needs, consult with experts, and prepare your financial documents early. A balanced approach to funding can keep your business moving forward.
Join the Conversation
Your questions are important.
Sharing thoughts or asking for advice can lead to new insights on navigating business funding challenges. Feel free to leave a comment or reach out for more information. Your feedback can create a supportive community for small business owners facing similar challenges.
