It’s notoriously hard for startups to get financing—especially using traditional methods. But what about alternative sources of financing? Is it possible for your startup to get funding using non-traditional financing means?
To get the scoop, we talked to Jared Hecht, the co-founder and CEO of Fundera, a marketplace that matches entrepreneurs with alternative lenders.
SCORE: Can you briefly explain what a non-traditional source of financing is.
Jared Hecht: A non-traditional source of financing is, generally speaking, a non-bank loan. So, it’s any form of financing you aren't getting at your traditional brick-and-mortar institution. Most often these products are found online, and most have different structures than a traditional long-term loan or line of credit.
SCORE: What are some examples?
Hecht: Invoice financing is a good example, where you use your outstanding invoices to collateralize a loan. You pay back the lender when your customer eventually pays you. Another example is a short-term loan. These are loans 3-18 months in length, which are paid back by daily ACH payments.
SCORE: Are these good alternatives for startups to find financing?
Hecht: It will always be harder for a startup to find debt financing, whether online or at a bank, as there is no financial history for the business, so, the owner's personal credit will be a huge factor. There is an interesting product out there for startups that compiles various credit cards from banks into one line of credit.
We also find that equipment financing tends to be a good option for startups. Of course, you should be using the funds to buy equipment, as the equipment collateralizes the loan. This helps offset the lack of financial history.
SCORE: Are some sources better than others for specific industries, such as starting a restaurant or an online e-commerce store?
Hecht: There are some lenders who focus on marketing to specific industries, but I highly recommend looking at the whole lending landscape, no matter what industry you are in. I think industry better defines what types of products you can work with. For example, restaurants are good short-term loan candidates because they have a large amount of daily transactions, and short-term loans are paid back daily. If I ran a bookkeeping firm, a short-term loan wouldn't be as good of a fit for me, as I most likely get paid a few times a month. However, invoice financing would be [a better chiuce] as I invoice all my clients for my services. Restaurants, on the other hand, wouldn't be good candidates for invoice financing, unless they have a large catering division.
SCORE: What are the advantages of getting funded by an alternative source?
Hecht: You are going to get a faster time to funding. Some lenders can get funds to you in a matter of days, others a few weeks. No matter what, online lending is faster than the banks. Second, the applications are a lot less time intensive [to fill out], which is a great thing for busy business owners. Additionally, bank lending to small businesses has declined since the financial crisis, which compounds the difficulties mentioned above. Finally, you have a higher chance of getting approved—approval rates are around 60 percent for the industry.
SCORE: Are there disadvantages?
Hecht: Absolutely. First and foremost, a non-bank loan will always be more expensive than a bank loan. In some cases, just a few points higher, but in others, the rates can be astronomically higher. You want to tread carefully and be certain you understand the true cost of a loan. It is very prudent to rate-shop. Also, since the industry is still in its infancy, it can be very difficult for small business owners to navigate. Which lender should they start with? Who has the best customer service? Who is going to offer the best rates? It can be a bit intimidating when searching, so I strongly advise business owners to do plenty of research before starting. Fundera helps with this by providing educational content for borrowers and by offering a lending marketplace that helps borrowers comparison shop and find the best loan for their needs.
SCORE: Is it realistic to think you can start your business through crowdfunding?
Hecht: Anything is possible. However, I do believe crowdfunding is more difficult than people realize, especially for raising large amounts of money. It is always a challenge to ask people for money but offer them little in return. I think the business models that perform best on crowdfunding platforms are those that have a physical product. For example, if you are selling fitness watches, the people crowdfunding your campaign are paying upfront for their watch and you can use their funds for production. They get something in return for their contributions. There's an obvious benefit for those contributing.