How Do Startups Qualify for Alternative Financing?

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Many new and small companies traditionally find it difficult to seek financing. Traditional lenders prefer organizations on a solid financial footing, with at least a five-year healthy business profile, and have established credit and stellar credit reports. 

The good news is gone are the days when traditional lending is the only option. In today’s digital age, digital lending is now on the rise, alongside other alternative lending options that don’t have outdated, labor-intensive lending processes common with traditional lenders. 

Here’s how startups, as well as small and medium-sized enterprises (SMEs), can qualify for alternative financing. 

Determine Needed Loan Amount

The market for alternative business loans is expanding and improving. Companies can now borrow as low as $500 up to $500,000 (or higher). With so many loan options, it’s crucial to determine how much funds you need upfront to narrow down your choices. 

The loan amount shouldn’t be more than what a business needs. Taking on high debt may quickly put a new or small company in financial trouble. It shouldn’t be lower than the company’s needs as well. If a company runs out of funds, it’ll likely borrow for more, which could help but also cost it more. 

So how much is enough? This requires companies to do research and be forward-thinking. They must consider these four factors: business finances, growth potential, the purpose of the loan, and total costs of the loan (including interest rates, fees, and other charges, as well as the repayment schedule). 

Once the ideal loan amount is determined, always shop around and compare lenders offering similar deals. For example, ask for quotes from  King of Kash and CreditNinja, compare their offers, and find out which offers better terms. 

Remember, the best loan isn’t the cheapest, but one that can meet the purpose of the loan while at the same time being suitable to the financial situation of the borrower. If confused, always seek help from a financial advisor.

Prepare Financial Projections for Business Plans

A business plan contains a company’s financial, marketing, and operational objectives. Besides core business activities, it also documents the organization’s road map for achieving its business goals. 

A financial projection, on the other hand, is a major part of a business plan’s financial standpoint. It’s a set of financial statements that can tell an organization’s future financial performance through financial forecasting, which is done by analyzing a company’s current business trends, past performance, and other relevant financial factors. 

Financial projections in business plans help a company with its planning and internal decision-making. For example, they enable them to prepare for revenue and expenses based on the market’s trends and patterns in supply and demand.

Additionally, alternative lenders often require financial projections, especially investors like angel investors and venture capitalists. These documents will give them an idea of how likely a company will earn, grow, and potentially scale in the future. 

The higher profitability and potential growth alternative lenders can see in a company, the lower their credit risk. This consequently encourages them to offer higher loan amounts and better loan terms. 

Know the Conditions of the Industry and Market 

Doing market research enables businesses to understand consumer behavior and economic trends, giving them ideas on how to improve their products and services. It also allows them to lower risks, determine and solve issues, and identify new business growth opportunities.

It also helps companies know their industry’s conditions. This is crucial since many alternative lenders, especially investors, only approve funding for companies in earning and booming industries.  

As such, in addition to a business plan with financial projections, companies must also prove that their industry and market are growing and can prime their business to succeed. This demonstrates their knowledge as entrepreneurs and business strategists and increases their chances for loan approval. 

Improve Credit Scores

As mentioned earlier, businesses with poor credit scores are the last priority of traditional lenders, and this could be the same for other alternative lenders. More often than, these companies with not-so-stellar credit are seen as high-risk borrowers. 

If your current credit isn’t good, consider looking for other alternative options that don’t consider credit scores, stable income, and proven track record. Such options include the following: 

  1. Equipment financing – based on the equipment’s value, which acts as collateral itself;
  2. Microloans – small business loans up to $50,000 that are usually available at peer-to-peer agencies, nonprofit organizations, or government bodies like the Small Business Administration (SBA)

Aim to be a responsible borrower and pay loans in full on time to improve business and personal credit scores. A good credit score doesn’t only increase a business’s creditworthiness for its next loan but also its credibility in the eyes of partners and customers. 

Final Thoughts

Always make informed business decisions and reach out to professionals. Although alternative funding options are most accessible online, choosing the right one that suits a company’s current financial situation and needs can be tricky. 

While their service isn’t for free, seeking professional advice is much more inexpensive than the potential loss a company may risk after choosing a bad alternative funding option and running a business with insufficient business knowledge.

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