The team at Capchase asks if you have been looking into more alternative financing firms and if so, then you are not alone. This, as the financing market is evolving “to include players beyond traditional banks.”
At Capchase, they receive many questions about alternative financing and “what this trend means.” Their goal is “to help founders make their best decisions and choose the right financing products for their specific needs. ”
As noted in the update, it’s about an acceleration in technology adoption, which has been “happening faster in recent years.” As more people are working remotely and choosing to stay home, there’s been “a rise in the need for digital services.” Many firms are now “under pressure to pace the demands of the market, as a result.”
Given this economic transition, startups require financial resources “to adapt to the market and pursue opportunities for expansion.” There’s high competition in the technology ecosystem, and “it’s critical that companies have access to the working capital that they need to meet the moment in their business journeys.”
According to the Fed’s quarterly Senior Loan Officer Opinion Survey, U.S. banks “saw a substantial increase in the demand for business funding.”
In order to address the demands of founders, new types of financial services providers “are emerging, ranging from independent private financing partners to small banks and venture-backed technology companies.” There are “a range of options available.”
As explained by Capchase, alternative financing “is funding that’s available outside of traditional major banks.” It gives founders “more flexibility and variety for choosing solutions for financial services.”
The company also noted that alternative financing “describes a category of financing products, including venture capital and debt, that address gaps in mainstream financial markets.” This trend is part of a larger financial inclusion movement, “in which more people are gaining access to formal banking systems.” Financial inclusion is about “making sure that businesses have access to useful and affordable financial products that meet their needs, in a responsible and sustainable way, according to the World Bank.”
For example, how can financial institutions “better serve people with imperfect credit histories?” What about people “who don’t qualify for traditional mortgages? Or companies that don’t qualify for traditional bank loans?”
Morgan Stanley notes that alternative financing models “are arising due to a market opportunity for individual investors.” These models include peer-to-peer (P2P) financing, in addition to online platforms that “use technology to bring together founders underserved by traditional financing institutions.”
In return, alternative investment firms “generate attractive returns.” Many alternative financing partners offer products to founders that “are ineligible for bank loans (or would receive loans with unfavorable terms otherwise).”
The field is now “evolving and expanding,” Capchase wrote in a blog post while adding that alternative financing “gives people and businesses the power of choice over their funding options.”
Put short, there are many different financial products out there. So it’s “a good idea to educate yourself and shop around before committing to a specific solution.”
Here are a few noteworthy ones:
- Invoice financing or factoring. This type of financing solution is for businesses that rely on accounts receivables (AR) with clients. It helps founders create smoother cash flow operations, to avoid payment delays.
- Crowdfunding. Founders rely on marketplaces to generate funds for their operations and endeavors.
- P2P lending. Founders and financing partners can connect directly to share resources on their own terms. P2P financing partners tend to be individual investors and companies.
- Lines of credit. Similar to traditional banks, lines of credit are available through alternative finance marketplaces. These lines of credit tend to have less stringent funding criteria than major banks.
- Term loans. With term loans, founders are able to apply for a fixed amount of funds, repayable over a specified period of time. Alternative term loans are similar to bank loans with established interest rates and a set number of payments; however the interest rates of term loans tend to be higher.
- Merchant cash advances. This short-term financing solution is for merchants that need cash quickly. During the application and underwriting process, financing partners will examine a company’s credit card receipts to assess repayment ability, payback periods, interest rates, and other fees.
- Revenue based financing. Revenue financing is a type of business credit that provides cash advances against monthly or annual recurring revenue (MRR or ARR). Founders can use revenue financing to access upfront capital, reduce the cost of managing cash, and invest in growth initiatives. This type of financing tends to be the best fit for Software as a Service (SaaS), ecommerce, and subscription-based companies.
Capchase is an example of a revenue financing partner, the firm clarified.
They also mentioned that with alternative financing, founders and financing partners have more tools “to hold on to their equity and avoid dilution.” Lines of credit and other debt products “do not require founders or investors to give up ownership in their business.”
As a result, founders can “maximize their access to working capital without relying on investment from a venture capital firm.” Instead of taking on funding, companies can “use predictable revenue streams to manage cash and always ensure that there is enough in the bank.”
Non-equity financing “is instrumental in helping businesses maintain their stability — especially if unforeseen circumstances or payment delays arise,” Capchase explained while adding that alternative financing “helps founders maximize their options.”