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The Real Deal on Alternative Funding for Small Businesses

Alternative_Funding_

Statistics on collaborations with banks suggest that only four out of five small business loan applications are accepted and processed seamlessly. Thus, alternative funding is one of the most sought-after solutions of small business owners when bank funding seems to be too difficult to obtain.

Here are some of the usual suggestions from management consultants for small businesses seeking alternative funding.

Debt Funding

Debt funding involves borrowing money and not giving up ownership of shares or position. Small businesses are less likely to acquire debt funding means, because organising debt issues can amount to much more than what they can afford.

Here are some of the most used sub-types of debt funding:

  • Intermediated Debt

An intermediated debt is a fixed income security with a maturity that occurs within the timeframe of 3-10 years. A business with fewer than 20 employees source almost half of the total amount of their debt from financial intermediaries. In this case, the most used financial intermediary are banks—with an approximate of ¾ of the whole SME community as clients. However, it is important to note that banks are more inclined towards household lending than business lending.

Some small businesses opt for finance companies to cover specialised debt products such as leasing, vehicle and equipment loans and debtor finance.

It is still highly advisable to seek another form of funding, though, because intermediated debt funding will have small businesses pay more because of their size.

  • Debtor Finance

Debtor finance allows small businesses to receive funding in exchange for selling their accounts variables. This can be done in two ways:

  • Discounting – business collects the accounts receivables
  • Factoring – finance companies or banks collect the accounts receivables

Australia has seen over 90% of total debtor finance users prefer discounting as its strategy, as it is particularly attractive for small businesses with large amounts of accounts receivables outstanding to reputable companies.

  • Trade Credit

It is not uncommon for the average small business to obtain the other half of its debt funding from its trade suppliers. Trade credit is what happens when small businesses receive inventory, equipment and services from them without immediate payment.

Trade credit is more advisable because it has the tendency to be less expensive. This is only possible, though, if the business repays the debt before an agreed repayment deadline. Otherwise, the debt can amount to more than bank credit.

Equity Funding

Equity funding, compared to debt funding, is focused on investment in shares rather than money.  Equity funding costs relatively less than debt funding for small businesses. Small business owners recognise that they can get more without paying more by utilising internal equity financing and external equity they can source from friends, family and business partners. These do not involve large transactions costs; thus, they are a lot less expensive.

It is when small businesses do not have access to up-to-date information on the various types of funding - whether through bank collaborations or through alternative ways - that they miss out on the many benefits of funding. Seek assistance from business advisors and management consultants when making business decisions you are not quite sure of. When it comes to your business operations and finances, there is no such thing as being too safe.

Ensure your business stays on the right track to success. Download our case study for a more in-depth view of the business industry to better understand your business’s status. You can also get in touch with our experts at myCEO to discuss your business and funding queries and concerns.

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Topics: Finance, Operations, business management