Best Industries That Benefit From Alternative Funding Solutions

What are Alternative Funding Solutions?

The category "alternative business funding" actually covers a wide range of funding options that are meant to give business borrowers access to capital outside of the traditional loan model. These include products and services like merchant cash advances, invoice factoring, equipment financing, business lines of credit, revenue-based financing, and more.

Alternative funding solutions are all a bit unique, but tend to be structured differently than traditional bank term loans. In some cases, they can be a better fit for how businesses in certain industries actually operate.

How Alternative Funding Solution Differ from Traditional Lending

Alternative lenders and alternative financing solutions differ from traditional lending in a few important ways.

• The approval process is typically faster and more flexible. Rather than waiting days or sometimes weeks to get approved and funded, some alternative funding solutions can give you access to capital as quickly as the same day.

• Eligibility requirements are non-traditional. Business lending decisions can be based on everything from cash flow and revenue to purchase orders or specific business assets, rather than credit scores alone.

• Repayment terms are structured to match how a business actually makes money. In some cases, that means repayments are based on a percentage of daily sales, a fixed monthly payment, or upcoming invoice terms.

Now, that flexibility comes with a trade-off: Interest rates on different types of alternative business funding are often higher than what you'd be offered on a traditional bank loan. But for businesses who need flexible cash now, and situations where a missed inventory order or delayed construction can cost even more, the speed and accessibility of alternative funding solutions can easily justify the cost.

Industries That Benefit from Alternative Funding Solutions

There are certain industries that benefit more than others when it comes to using alternative capital funding solutions. Here are a few.

1. E-commerce

Inventory is everything for an e-commerce business. So when a product is trending or a seasonal window is opening, being able to stock up quickly can mean the difference between catching an opportunity and watching a competitor take it. But the problem is that many e-commerce businesses don't own a lot of hard assets, so traditional underwriting can be tricky.

Instead, alternative funding solutions might be a better fit. With revenue-based financing and merchant cash advances, for example, funds are approved based on the business's sales volume. Repayment is tied to a percentage of daily or weekly sales, which means payments automatically slow down when revenue does. This is incredibly useful for businesses with volatile sales or seasonal slumps.

Business lines of credit are another popular (and flexible) option for e-commerce businesses. With a line of credit, you can pull what you need as you need it; as you pay down the balance, your available credit refreshes and can be used again.

2. Trucking and transportation

Cash flow is a difficult thing to balance in the trucking industry. Expenses like fuel, maintenance, driver pay, and insurance all have to be paid on a continual basis, even though payments from freight brokers and shippers can easily take 30, 60, or 90 days to arrive, depending on the agreed terms. That cash flow problem affects carriers of all sizes.

Invoice factoring is a common alternative funding solution for those in the trucking industry. With invoice factoring, a trucking company sells its unpaid invoices to a factoring company at a slight discount in exchange for immediate cash, sometimes as quickly as the same day. The debt is satisfied when the customer pays their invoice, so business owners can enjoy access to working capital without taking on any new debt.

Equipment financing is another option in the trucking and transportation industry. Trucks are expensive, and traditional lenders often require big down payments and have long approval timelines. Alternative lenders specializing in trucking equipment financing can get you access to equipment faster; sometimes the truck or machine itself is the only required collateral.

3. Retail

Retail businesses deal with cash flow issues that are very unique to them, especially when it comes to independent retailers and specialty shops. Inventory is purchased weeks or months before it sells, so seasonal holiday items, back-to-school, viral products or major promos require upfront spending that won't produce revenue until much later.

Merchant cash advances are commonly used by retail businesses because they're fast and tied directly to card sales volume. A retailer can tap into a cash advance against their projected future sales, then repay it automatically as sales come in. It's not the cheapest financing option, but for things like short-term inventory needs, it can be the simplest.

4. Healthcare

Healthcare businesses don't always get paid right away, which can create a bit of a unique cash flow hiccup. Whether you own a medical practice, dental office, clinic, or home health agency, the process is typically the same: you do the work for customers and provide care, but might have to wait weeks to actually get paid for those appointments.

Add in insurance reimbursements, Medicare or Medicaid payments, and typical patient billing cycles, and it's easy to see how a big lag can exist between the time when services are rendered and when cash flows in.

That's why invoice factoring and accounts receivable financing can be especially helpful for healthcare businesses. Rather than waiting on a big insurance reimbursement check or patient payment to make payroll, the business can go on as usual without any delays.

Some healthcare businesses also have big equipment financing needs to consider. If your medical office needs imaging equipment, dental chairs, surgical tools, or EMR systems, equipment financing can be easier (and faster) to get through alternative lenders than through traditional banks. The equipment serves to secure the debt as collateral, which makes it less risky for lenders and sometimes unlocks better terms or rates.

5. Construction

Construction businesses deal with some of the most unpredictable cash flow situations in any industry. Between overdue payments, change order disputes, and payments to subcontractors and material suppliers, the expenses don't stop... even if the general contractor's draws are delayed.

Alternative funding solutions for construction businesses tend to be things like business lines of credit, equipment financing, or invoice factoring. A business line of credit lets contractors draw cash as needed to cover material costs or payroll between draws, then pay the funds back as project payments come in. Equipment financing lets you get the heavy equipment you need now, without paying out of pocket upfront. And invoice factoring unlocks cash for signed contracts or completed work, even before the customer pays their invoice.

Alternative financing and seasonal or fast-growing businesses

There are two business profiles that are especially suited to alternative funding solutions, regardless of their industry. These are seasonal businesses and quickly-expanding ones.

Seasonal businesses have a big problem with traditional financing: their revenue looks terrible during the slow season and fine (or even great) during peak times. Banks might see a company as subpar when looking at an annualized snapshot, even if it's actually doing pretty well on a full-year basis. That's why alternative lenders that evaluate cash flow and revenue trends (rather than balance sheet snapshots) get the full and more accurate picture.

Quickly-expanding businesses have a different problem. Fast growth can cause cash flow gaps: you need to hire, buy equipment, and build up inventory before the revenue starts flowing in. Traditional bank loans often don't move fast enough, and their eligibility criteria may not necessarily be the most accurate reflections of these businesses' growth trends.

Alternative business funding can bridge that gap with faster approval times, flexible repayment options, and loan products that are catered to the actual flow and growth of the business.

Final thoughts

Alternative funding solutions aren't a last resort for businesses that can't get traditional loans. Instead, for a lot of industries, they're truly a better tool for borrowing. E-commerce, trucking, retail, healthcare, and construction all have unique cash flow situations that don’t always work well with traditional business loans, making alternative financing worth a look.

If your business is largely seasonal, quickly growing, or you're operating in an industry where cash flow creates regular hiccups, it's worth exploring which alternative funding solutions are available to you.