6 Alternatives to Debt Financing For Business Owners

Whether your business is at its initial stages or is already looking to expand, you’ll likely want to secure some funding at some point. Though most business owners use debt finance to fund their businesses, the current economic situation makes it a nightmare to obtain business loans from banks and other lending institutions—especially for a business with a poor credit rating.

While there’s no standard credit rating or score that’s acceptable to all lending institutions, each has what it considers acceptable before they can grant a loan.  If you find yourself in such a situation and cannot secure a bank loan, you need not worry. There’s no challenge with no solution in business, and financing isn’t an exemption. So, if you’re unable to get a bank loan to finance your business, you can always go for other alternatives.

This article guides you through some of the simple yet effective debt finance alternatives you can consider for your business. Knowing these options, you don’t have to close down your business prematurely.

1. Convertible Debt

Convertible debt is one of the best alternatives you can consider when financing your business. This is where an investor gives you a loan with the aim of converting it to equity in the future.

Just like in the case of SAFE note, the investor agrees to convert their debt to shares equivalent to the amount they injected into your business. Though this can be a great way to get funding, you must be careful not to lose control of your business. This is because some investors can inject a lot of money into your business with the aim of controlling it in the future.

2. Grants

One of the simplest ways you can consider when financing your business is going for grants. Grants are financial aids awarded by the government to businesses or individuals whose project shows a high chance of succeeding.

When you receive a government grant, you’re not supposed to refund it. This makes it highly competitive because it attracts many applicants. However, you can still apply for it, especially if you can meet the federal research and development goals.

3. Business Credit Cards

Instead of using overdraft loans to buy business assets, you can use business credit cards to acquire them. Credit cards allow you to shop for items when you’ve got no money in your bank and pay the cost at a later date.  It’s one of the cheapest sources of business finance because you’re only required to pay a small standing fee. Also, some banks can offer an interest-free credit period, usually for 30 or 45 days.

4. Venture Capitalists

Venture capitalists are people or firms that pump money to various businesses with the aim of sharing the business profits or owning part of it in the future. It’s the best method to raise funds, especially for startups and small businesses that don’t have assets to secure bank loans.

However, venture capitalists will require you to have a well-drafted business plan if you decide to go this route. Having a solid business plan allows them to develop confidence in your business before they can fund it.

5. Hire Purchase

When you want to buy a business asset, and you don’t have enough money, the best thing you can do is to turn to a bank loan. However, if you don’t have collateral to help secure a loan, the best alternative is to acquire your preferred asset through the hire purchase method.

When you acquire an asset through hire purchase, you’ll be required to pay a down payment then agree to pay the remaining balance plus the interest in monthly installments.

Though you’ll continue using the asset, the ownership isn’t transferred until you pay the last installment. Hire purchase is the ideal method for a company that wants to acquire an asset that it can’t immediately afford.

6. Bootstrapping

Bootstrapping is one of the most effective ways of raising funds without going for bank loans. It includes doing all that you can do to finance your business such as using your personal savings, selling off some assets, aid from family and friends, and many more.

This method is mainly applicable to startup businesses whose owners still have no clear picture of how much money they need to run, manage, or expand the venture.

Takeaway

As you’ve seen, there are several debt finance alternatives you can consider for your business. However, no matter which method you decide to go with, it’s vital to have a comprehensive business plan to help increase your chances of acquiring funds.