Business Financing: Traditional Loans vs. Alternative Funding

Business financing is getting the funds needed to initiate or operate a business. Businesses use these funds to make purchases or invest to expand their business activities in the future. It has many aims, such as:

• Budgeting
• Financial forecasting
• Investment analysis
• Risk management

However, the primary goal of business finance is to maximize shareholder wealth by generating profits and minimizing loss. Every aspect of this amount is used to increase the value of the business. MAGAS Services is here to witness the growth of your business.

How does Business Financing work?

You can divide business financing two categories: equity and debt. Equity finance is when a business sells shares to raise capital. Debt finance is borrowing money from a lender to pay it back with interest.

This blog will introduce two terms: traditional loans and alternative funding. Both are associated with Business Financing and play a significant role in impacting your business's success. We will explore what they mean, their pros and cons, and what to choose in which condition.

Importance of Securing Funding

Funding is the lifeline of any business as it helps launch and grow. Only 13% of small companies succeeded in getting loan approval from big banks last year. Comparatively, the approval rate for loans from non-traditional lenders is 30%. These stats showcase the difference between the two. Therefore, it is necessary to secure the correct type of funding to:

• Even-out cash flow.
• Invest in equipment and inventory.
• Hire and train employees.
• Market their products or services
• Innovate and develop new offerings

Two Main Types of Business Funding

When it comes to answering the question of where you would go to get a business loan, this blog will help you. Business analysts defined the two main types of business funding. Both have distinguished features, advantages, functions, and drawbacks. Let’s learn each of them to choose the right one.

Traditional Loans

Capital is the one ingredient every business needs, whether small or big. The primary source of loans is traditional banks. It is a financial institution in your neighbourhood that can offer slightly better interest rates than alternative lenders. However, the borrowing requirements can be more rigid and complicated than alternative lenders. There could be a relatively long waiting period to get your funds, but it could save you significant money regarding your total capital cost. With all these risks, it is still the most popular type of lender for small businesses.

Pros and Cons of Traditional Loans

Small business owners should know the benefits and risks of using their neighborhood bank for a loan. Therefore, we will discuss it here.

1. Traditional loans comes with lower interest and strict lending requirements
2. You can get the services from the lending expert, however the process is long and time consuming.
3. Establishing a stable relationship with the bank can fetch long term benefits, but fluctuating cashflows cannot be accommodated.
4. Fixed repayment schedule can make budgeting easier however a proven track record and high credit score is a must.

Alternative Funding

Due to the financial crisis, alternative options for Traditional Loans from banks are on the rise, such as alternative Funding. Alternative funding refers to financial institutions operating outside the traditional banking sphere. It has become an important part of the dynamic landscape of business finance. It provides tailored solutions for modern businesses. These platforms offer smaller, short-term loans for temporary needs. This kind of funding may involve sharing in the management and governance of the business.

Types of Alternative Funding:

You can get funds in many ways other than through a bank account. 

These are some ways you can get funds:

• Crowdfunding through online platforms..
• Peer-to-peer lending from individuals or groups
• Invoice financing by trading their outstanding invoices to a third party

Pros and Cons of Alternative Funding:

1. The main advantage of alternative funding lies in its speed, as the funds can be accessed promptly but at a relatively higher cost.
2. More flexible payment options may be tailored as per your requirements as the terms are not standardized.
3. Funding is through private sources, however a broader approach towards lending as factors other than credit score given more leverage.
    

Key Takeaways of both types of funding

Here are some critical points that every finance person must know.

• If you can wait and meet the criteria, choose traditional banks.
• If you have a borderline credit score, consider alternative funding. According to the Al Etihad Credit Bureau, a credit score above 680 is considered good. You can use the AECB App to calculate your credit score in Dubai.
• Prepare your paperwork, such as an updated business plan, past bank statements, and tax returns, before applying for a loan.

Conclusion

Both alternative and traditional funding provide for your capital needs and financial circumstances. You decide to grow with the right kind of finance. Therefore, contact MAGAS if you seek professional help in the UAE. Our finance gurus empower entrepreneurs, startups, and small business owners with our expertise in various domains such as Management Consultancy, corporate finance, and much more. Browse through our website now to get the desired stability with a click.

Frequently Asked Questions

What factors should I consider when choosing between a traditional loan and alternative funding?

Consider the following factors when choosing between a traditional loan and alternative funding.

• Evaluate your business stage, as startups and early-stage businesses need immediate funds.
• Traditional loans are the best option if you have a strong credit history.
• Urgency is pivotal in deciding between a traditional loan and alternative funding. If you need funds quickly, alternative funding might be the better choice.

How can I improve my chances of getting approved for a traditional loan?

Adopt these ways to improve the chances of getting approved for a traditional loan.

• Build a strong credit history
• Prepare a solid business plan
• Provide valuable assets
• Develop a relationship with your bank

What are some red flags to watch out for with alternative lenders?

There are some red flags to watch out for if you opt for alternative funding.

• hidden charges
• Unclear Terms
• Pressure for quick decisions
• Lack of Transparency
• No face-to-face meeting

Is crowdfunding a good option for all types of businesses?

Not for all. Crowdfunding can benefit small businesses as it raises money without any traditional debt. Moreover, it can help you reach your target audience if you sell appealing products or services. However, you need to be aware of the hazards and regulations of this kind of funding.

How do I find angel investors or venture capitalists interested in my business?

Networking, leveraging online platforms, and preparing a solid pitch are common ways to attract angel investors or venture capitalists. Choose one that aligns with your preferences.