Need to fund your business? Here are three alternative financing options you need to know.
Financing your own startup can only get you so far. When your business is doing well and you’re looking to grow, it’s time to raise some extra cash.
But before you put on your suit and tie and pay a visit to your local bank (or, gasp, loan shark!) you should know that there are tons of funding options out there. These alternatives might be better for your business at this point in time.
Just to run you through the basics, there are two types of business financing: (1) equity and (2) debt funding.
But did you know that in between these two types of business financing, there’s a whole spectrum of alternative funding options available to you? Here are a few:
Most people are familiar with the concept thanks to Kickstarter, a US-based crowdfunding platform. It has supported some of the most successful products today, like Exploding Kittens and the Fidget Cube.
But what is crowdfunding exactly? Well, you could think of it as a form of equity funding where you pitch your product and idea to interested parties. In exchange, you offer them something for their contribution. It can be a quick and easy to set-up choice of small business funding.
And it’s not just equity that you can offer. For smaller contributions, you could also give something like exclusive first-runs or product discounts.
Other than big guns like Kickstarter and Indiegogo, there are also local crowdfunding platforms. The Spark Project features local homegrown businesses on their website.
Peer-to-peer (P2P) lending is a relatively new financing option. Think of it as a mix between crowdfunding and debt funding.
Instead of approaching individual lenders, you can use a platform to raise funds and choose from several different lenders. They can offer the best deals or interest rates for your purpose.
Another alternative to traditional funding is invoice financing. This is also known as invoice trading or accounts receivable financing.
This form of funding is especially useful for SMEs that deal with delayed payments and irregular business cycles. These SMEs need cash to maintain their day-to-day operations.
Instead of following up with clients, you have the choice to sell your invoices to investors. You can also take out a loan that’s equal to the amount of the invoice.
A popular local FinTech company that does this is Acudeen. They allow funders to bid on an SME’s invoice. You can do the transactions through their platform.
Let’s not forget, the government also offers microloans to SMEs.
These are usually easier to get compared to bank financing, since they have fewer requirements. Plus, these microloans were created to promote entrepreneurship and to prevent damaging financial situations (think: 5-6).
This includes programs such as the Development Bank of the Philippines’ (DBP) Small Business Puhunan Loan Program (SBPLP). It allows SMEs to borrow a minimum of PHP300,000 and a maximum of PHP1 million.
President Duterte’s recently launched Pondo sa Pagbabago at Pag-asenso (P3) program allows SMEs to borrow as little as PHP5,000 to PHP300,000 at a maximum interest rate of 26% per annum, with no collateral requirement.
These are just a few general forms of alternative financing available to Filipino SMEs, other than the usual ways of raising your own money, venture capital funding, and bank loans.
And depending on the industry you’re in, you could have access to other different forms of credit as well! It’s important to remember that not all funding is made equal. You need to know the pros, cons, risks, and challenges of each.
While capital is essential for running a business, the wrong deal could also put you in a tight spot. To determine the type of funding that might be best for you, ask yourself these questions:
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