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4 Reasons Small Businesses are Using Alternative Funding for Growth

Small Business Funding

Since the 2008 financial crisis, most small businesses and individuals looking to launch their startups have had limited options in securing funding. What was once considered an economic anchor of the United States, small businesses now account for less than 50 percent of the GDP. In contrast, business investments have continued to see only modest growth since the pandemic.

Traditional funding methods like small business loan programs, venture capitalist and angel investment opportunities, and public or private grants are still promising options. However, in the present economy, company funding and financing have remained increasingly difficult to secure from investors and banks. This especially includes those solely searching for profitable and sustainable investment opportunities. As a result, some entrepreneurs and small businesses may be better suited to using alternative financing for growth. That is, at least during the time where small business borrowing continues to recover from the impact of previous years.

Where can you begin your search for alternative small business funding opportunities when traditional funding methods already feel discouraging to reach? Here, we present four compelling reasons why considering alternative small business funding is necessary in today’s dynamic landscape. Because of rising market unpredictability and fluctuating investor preferences, small businesses and startups – often with limited resources – must adapt. They can do so by considering alternative funding approaches to thrive while remaining resilient in the face of economic uncertainties.

1. The Global Economy is Still Recovering

Despite the last decade’s economic challenges and the impact of the pandemic, small businesses have experienced significant recovery. However, according to the IMF World Economic Outlook report for April 2023, the world economy is expected to remain sluggish for at least the next five years.

The PwC Foundation tells us that to establish strong economic recovery and growth in the coming decade, we must continue to see our government construct the environment and structure that allows businesses of all sizes to flourish. On the national scale, this means directing investments towards direct capital injections and increasing activity through public-private partnership structures. Yet, for small businesses, this may be less promising.

With such medium-term growth expected, startup entrepreneurs, small businesses, and those focused on maintaining their personal finances and retirement funds must be open to non-traditional financing opportunities. For instance, Murray Newlands, an entrepreneur and Venture Advisor for the Network of Things Fund, notes that to get funding for your small business, you must be realistic about the fact that traditional financing methods are disappearing. Instead, entrepreneurs must become more creative and resilient when searching for capital support.

2. The Financing Landscape Has Changed

Over the last few years, traditional financing has become increasingly challenging for small businesses in the rapidly changing economic landscape. According to the Q2 Small Business Index presented by the U.S. Chamber of Commerce this year, small businesses have had to continuously adjust to the impact of tighter credit options and higher interest rates compared to larger business competitors. High interest rates have delayed the ability of 50 percent of small businesses to expand their operations. And all the while, others have acquired more loans to cover additional high costs.

As a result, many businesses are turning to alternative financing options like peer-to-peer lending, online merchants, crowdfunding, self-financing, and product presales. In many cases, this can be a workable option, but it isn’t without risk. The statistics of small business failure within the first five years of operation paint a dismal picture of entrepreneurs’ challenges in the current economic climate.

Advancements in the Growth Mindset

With the abundance of changes in the financing landscape, companies that want to survive in the long term have no choice but to adapt with a radical shift in mindset. Esther Kestenbaum Prozan, a multi-industry C-level executive and expert in high-growth business environments, has first-hand experience achieving exponential growth with limited resources. In her newly-released book, “Bigger and Better,” she challenges the age-old way of thinking that companies must choose between growing lean, fast, and well.

The highly regarded playbook for scaling a business from infancy or small into a mid- or large-size business takes a disciplined yet practical approach to navigating the development and use of owned channels, partnerships, thought leadership, and radical generosity for tenfold revenue growth. Prozan shares that by focusing on acquiring the right customers and taking steps to cost-effectively increase your enterprise value using owned marketing channels, any business can see growth, regardless of current economic conditions. Small business books like this one are invaluable in helping guide entrepreneurs through these challenging waters. Business leaders should heed this advice as they build their growth strategy for the years ahead.

3. Small Business Creditworthiness Remains Low

It is not unusual for businesses or individuals with poor credit histories to have difficulty securing loans and other credit options. But in times of economic turbulence, the finish line established by banks and other lenders becomes even more difficult for startups and small businesses to reach.

According to Bankrate, this is especially true for companies operating in certain industries and those with no business collateral or too much debt. Even businesses with a low but somewhat acceptable credit score may have difficulty securing funding from a lender. This could happen if they’re applying for the wrong type or amount of funding, or haven’t yet developed a proper business plan.

There are some who cannot acquire a line of credit, loan, or credit card as a small-business owner, or are only offered high-interest rates. In cases like these, alternative funding can be another source of startup funding that is easier to obtain. Entrepreneurs who do not have access to traditional funding can turn to financiers who help applicants improve their credit scores. Then, they can apply for conventional funding opportunities later down the road.

A study published by the Association of Chartered Certified Accountants recognizes that FinTech companies are playing a leading role in helping small businesses find new financial opportunities. The fact of the matter is, small business loan opportunities have declined over the last 30 years. This is why FinTech companies and other alternative lenders provide greater credit flexibility to help small businesses qualify for funding.

4. Digital Technologies Are Impacting The Market

Businesses are impacted by the economic environment and correlating changes to current credit rates. At the same time, digital technologies have also significantly impacted the present business market. As recognized by Forbes, the business loan market has largely shifted to digital platforms across every industry. As a result, entrepreneurs can submit loan applications and supporting documentation in the virtual sphere with greater accessibility and efficiency. This has also laid the foundation for better borrower-lender communications. Consequently, this has streamlined the overall process and boosted the borrower experience.

Furthermore, integrating automation and digitization has lowered operational costs for financial lenders and provided additional data beneficial to small businesses. A recent report by the World Bank found that “the use of alternative data sources and big-data analytics provide additional information sources to the credit risk-assessment process, allowing SMEs that were once unable to obtain finances to gain access.”

Financial Solutions Aided by Digital Technology

Much like FinTech opportunities previously discussed, digital technologies can support newer business models and reduce financial barriers to small businesses. However, this does not mean financial challenges disappear for small businesses and startup companies. Studies presented by the Urban Institute and Wolters Kluwer found that digital lending is now essential for community banks looking to support small business customers. Yet, there remains a gap in the technical support available, and small businesses and entrepreneurs continue to be underserved.

To combat this, small and medium-sized enterprises and startup companies must look for alternative lending prospects. Specifically, they should find ones that balance integrating new digital technologies with traditional models. McKinsey & Company said it best when identifying technology as a differentiator in the current market, in that “The most successful of these banks develop their sweet spot and integrate these [SME] investments with their existing systems” by strategically “adopting a modular approach to SME lending.” In other words, business leaders must be open to new opportunities when finding investment openings. And, lenders must reevaluate their definitions of value and growth for their companies.

Alternative funding gives more options to businesses

Because of rising market volatility and changing investor preferences, small businesses and startups with limited resources must adapt. They should also consider alternative funding approaches to thrive and remain resilient in the face of economic uncertainties.

This can include finding an alternative financing option that offers a wide range of benefits. Benefits should include simpler credit qualifications, minimal collateral requirements, flexible repayment terms, unsecured funds, and earlier access to capital. For many SMEs and startups in the present economy, new opportunities exist with FinTech and digital technologies. At the same time, others look to deliver sustainable growth by building owned channels and maximizing short- to long-term profitability.

These flexible and sustainable alternative funding options allow business owners to see growth. What’s more is that these options are possible even in an uncertain and highly competitive economic landscape. Even then, business leaders must remember that success is not simply about the amount of capital available. It’s also about the positive mindset brought to the podium and their innate ability to sustain themselves in unreliable times.

[Related: Ditch the Debt, Fuel the Dream: Alternative Funding Strategies for Small Businesses Avoiding Loans]

Featured Image Credit: Photo by Karolina Grabowska; Pexels; Thank you.

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