Alternative Solutions To Small Business Credit Woes
The coronavirus pandemic has left a significant dent in the economic growth globally. According to an IMF report, the global economy contracted about 3.5% in 2020, which is 0.9% higher than the predicted figure. However, this international body is also expecting a turnaround in 2021 with a projected growth of 5.5%.
Keeping in sync with the global economic growth, the Indian economy showed signs of recovery and expected to pick up pace in the 3rd and 4th quarter after the second wave of Covid-19.
If you are a small business owner, things must have been tough for you during this period, especially funding-wise. Traditional financiers are riddled with rising NPAs. Resultantly, they’ve introduced stringent eligibility parameters, making it challenging for budding entrepreneurs to get needed funding.
So, instead of looking into traditional options, you can explore alternative finance avenues.
Top 5 Alternative Funding Options That You Should Be Aware Of
Following are some alternative lending avenues to keep your business finances on track –
Secured Loans or Asset-Based Lending
One of the most popular alternative funding solutions is to opt for a secured loan. Here entrepreneurs can mortgage an asset, be it personal or company, to secure funding. A significant advantage of this method is its easy eligibility and lower interest rate. Moreover, business owners can decide their loan amount previously and opt for a mortgage accordingly.
Herein, a lender places a lien on the collateralised asset. Upon clearing the debts, the financier relinquishes its claim and gives it back to the borrower.
Line Of Credit
Line of credit shares a similar working principle as a credit card. Here, borrowers can meet different financial requirements and pay back the amount at their convenience. A notable advantage of this method is that debtors are only responsible for paying interest on the amount they withdraw and not the available credit limit.
For instance, suppose you have a credit limit of Rs. 10 lakh, and you have used Rs. 4 lakh for any purpose. Then, you are only responsible for paying interest on Rs. 4 lakh, not on the total available limit.
Moreover, lending institutions keep revising this limit as borrowers complete their payments. Nonetheless, a credit line facility is not always available. Often, financial institutions extend this facility to reliable customers they have a long working relationship with.
Invoice financing can be an ideal option for alternative lending for small businesses. Technically, it is also a type of secured financing, where companies keep their unpaid invoices as collateral and avail funds against them.
Invoice financing has two categories, factoring and discounting. In factoring, companies sell their invoices to a lender and get a portion of the total invoice value upfront. When lenders receive the full payment against those invoices, they remit the balance amount minus the finance cost to respective borrowers.
On the other hand, in invoice discounting, borrowers are responsible for collecting their unpaid invoices. Here, the lender will only receive the repayment per the loan agreement. Businesspersons can upload scanned copies of their approved invoices on platforms like KredX to receive funding within 72 hours.
Another alternative lending for start-ups is revenue-based financing. Also known as royalty-based financing, enterprises can leverage their projected earnings to obtain funds against it. They can resort to platforms like KredX to obtain financing via this method.
Suppose a company presently earns Rs. 3 lakh/month on average. Therefore, their yearly projected earning is Rs. 36 lakh. Investors will assess the viability of this projection and invest accordingly.
In this model, investors receive a regular pay-out till the total outstanding sum is cleared. This financing method has two distinct advantages:
- There is no interest levied on the outstanding amount
- The payment amount is not fixed; it is premised on a firm’s monthly revenues
Hence, during lean seasons, enterprises can pay smaller amounts, and when sales are strong, they can pay larger sums to clear their dues quickly.
Crowdfunding is another way to get investments for a venture. Various platforms across the internet allow companies to put up their portfolios, and interested investors can choose to invest in such organisations.
Typically, crowdfunding has two sub-types, reward-based and equity-based. As its name suggests, in a reward-based system, the firm will offer services or commodities in exchange for investments.
Whereas, in equity-based crowdfunding, investors will get a portion of the company ownership in exchange for their investments. Even though crowdfunding seems like an easily accessible way of gathering funds, it is time-consuming and often takes months to raise the required funds.
Knowing the alternative ways of securing funds is the battle half won. All you need now is the right source, like KredX, to help you obtain funds timely.
Contrary to popular opinion, ways to secure alternative finance are not risky if done right. Nearly all fintech companies and new-age NBFCs strictly adhere to SEBI and RBI guidelines. Thus, you have nothing to worry about. However, it is always advisable to go through the terms and conditions of a particular financial product before signing an agreement. It will help you learn more about your debt obligation and avoid facing any issues in the coming days.