When you’re running a business, you would like every day to go as smoothly as possible, with no hiccups whatsoever. However, while normal operations might be the norm, there are always days when disruptions occur.
These can range from ordinary errors to issues that hit the headlines. The most common types of business disruptions include supply chain challenges, staffing issues, technology failures, natural disasters, and cybersecurity incidents.
Ideally, you would want to fix a disruption to your business as quickly as possible. However, this can only happen if you have a business continuity plan. Think of it as a contingency plan that focuses on continuing business operations and outlines how and where the business will operate during a minor or major crisis. In other words, it’s a type of emergency management that aims to assist your business in surviving a disaster or other types of crises.
One major disruption that businesses will typically face during a crisis has to do with its cash flow. Liquidity, or having immediate cash to pay the bills due today, can become a problem when something unexpected occurs or impacts the operations of a business. Simply put, if a business doesn’t have money to pay its suppliers or vendors and creditors, it will have a difficult time continuing to operate.
“Business as usual” during a crisis can only be made possible when you have the funds to continue running the enterprise. Otherwise, the business would need to pause, halt or even shut down its operations. And, this is where alternate business financing comes into play.
Alternate Financing & Liquidity
Alternate financing refers to the funding methods and financial channels a business can tap into that are outside of conventional commercial banks and traditional public capital markets. In other words, these are external funding sources outside of banks or stock and bond markets.
Funds can come from individual investors or non-bank lending companies, which evaluate credit differently from banks, use new metrics or indicators of creditworthiness, and implement a different criteria for funding. Alternate financing typically takes advantage of online platforms or technology-enabled marketplaces to directly connect borrowers with lenders.
Examples of alternate financing include peer-to-peer lending, online marketplace lending, equity crowdfunding, invoice trading, and merchant cash advances.
Why Does Alternate Financing Matter in a Continuity Plan?
When a crisis hits, traditional banks and similar financing institutions become significantly less accessible for businesses. On the contrary, these lenders typically tighten their standards to avoid risk during times of crises. As a result, borrowing from banks doesn’t only become harder, it also comes with higher costs in the form of increased interest rates, upfront fees, and lower valuation for collateral.
So, many small and medium-sized businesses often turn to alternate financing sources when they’re in a crunch during a crisis. By monetizing non-cash assets or securing non-bank funding, alternate financing provides much-needed and immediate cash injections to a business during a crisis.
Aside from keeping the lights on, so to speak, and in addition to being more accessible than banks, alternate financing also provides the following advantages:
- Accessible to underserved businesses: Forsome businesses, such as those with a poor credit score or who operate in emerging markets, alternate financing provides capital they would not have gotten from traditional lenders. Banks would take one look at their profile and decline their credit application for being too high risk.
- Direct access to lenders: This setup gives lenders a direct insight into business operations, which makes it easy for them to adjust terms, follow-on capital, and absorb risk more efficiently. The debt is no longer just a transaction; it has now become a strategic partnership.
- More flexible terms: Thanks to direct access to lenders, businesses can directly negotiate repayment schedules, which can be customized based on real-time revenue.
- Reduced transaction costs: Direct access also lowers borrowing costs. Without expensive broker fees and bank origination charges, alternate financing providers pass on these savings as lower interest rates.
- Speedier funding process: Alternate financing doesn’t have the multi-layered approval structure of traditional banks involving lengthy reviews and different financial reports, so lenders can make faster decisions. Approvals typically happen in hours, not weeks, thanks to automated data feeds.
- Wider or varied offerings: The long-term monthly payment scheme common to most bank loans can be good if that’s what a business is looking for. However, for a business that needs short-term cash injections, for instance, this setup can become a burden. Fortunately, the wide array of alternate financing options means that businesses have a higher chance of finding one that suits their needs.
- Flexible collateral: If a loan requires a collateral, what banks tend to accept as such can be limited. For instance, they typically agree to have real estate and cash and other liquid assets to be collateral for a loan. On the other hand, alternate financing is not as limited. For instance, some types of alternate financing options accept unpaid invoices as collateral for a business loan.
Alternate Financing’s Role in a Business Continuity Plan
Alternate financing acts as a critical financial safety net by providing immediate liquidity when primary revenue streams or traditional credit lines fail during a crisis. As such, it serves a crucial liquidity bridge by covering operational costs during periods of revenue gaps.
Because it is accessible even when traditional credit lines, such as banks, are frozen, alternate financing acts as a credit fail-safe. No matter what disruption affects your business, you always have financial support you can lean on.
Important Notes on Execution
There are three important things a business should consider when including alternate financing in their business continuity plan.
First, businesses should establish terms and covenants with alternate financing providers before a disruption occurs. Don’t wait to negotiate during a crisis. Rather, pre-arrange alternate lines of credit beforehand.
Second, businesses should set financial thresholds that will trigger automatic authorization of alternate funding.
Third, they should also designate or assign specific “second-in-command” personnel who can sign off on alternate financing if the primary signatory is unreachable.