Whether you’re just starting out or have been in business for quite some time, as a small business owner, you are bound to face situations where you’ll need an immediate funding solution.
While a traditional loan is seen by many entrepreneurs as the ideal solution to business financing problems, banks may not always be interested in helping small business owners.
Also, if your business reaches a point where you’re unable to meet the stringent criteria set by banks, options that are likely to cross your mind are maxing out your credit cards, selling your personal assets, stealing from your retirement fund, or borrowing a loan against your home or office.
Sure these options are great, but there are several alternative funding solutions that you can choose from without having to tap into your savings or putting your property at stake.
If you’re willing to give alternative funding a shot, here are some solutions that you can use for your business needs.
Asset-based lending involves using assets that you intend to buy as collateral for the loan amount you borrow. In other words, the asset financing company remains the owner of your assets until you make the last payment.
With asset financing, you can choose either hire purchase or lease purchase. The former type of funding includes the asset on your balance sheet, and in the latter type, the asset stays off the balance sheet until the amount has been paid in full along with the purchase fees.
Lines of Credit
This funding solution helps businesses pay for short-term expenses like purchasing equipment, expanding inventory, covering operating costs, etc. Lines of credit work similar to credit cards- you are given access to a certain amount of funds that you can use as you see fit. Regular payments are made by the financing company and you can withdraw as much money as you want. Interest is charged only on the amount of money you withdraw!
Note that interest rates on a business line of credit are slightly higher than prime lending rates, but lower than credit card rates.
Invoice factoring is perfect for companies selling B2B services or products. In this type of financing, invoices are issued to clients or customers and invoice copies are sent to the lender. On receiving the invoice copies, the lender pays a percentage of the invoice value to the company. Once payment has been received in full from the clients or customers, the lender pays the remainder of the invoice value to the company after deducting fees applicable.
Merchant Cash Advance
A merchant cash advance is secured after the lender inspects the company’s cash flow and verifies a steady positive flow. This funding is also secured by future credit card transactions, making it a smart alternative to business loans and other traditional financing options, especially for small businesses that lack credit ratings or collaterals to secure bank loans.
Purchase Order and Trade Finance
Small businesses don’t usually find sales or production to be a challenge; it’s locating financing to procure raw material or pre-sold merchandise that’s more of a task. By opting for purchase order financing, producers, distributors, wholesale suppliers or distributors can grow their business without increasing bank debt or selling equity.
Purchase order and trade financing is a fast and flexible financing option. This alternative solution allows businesses to fulfill larger orders and make more profits, helps make timely deliveries, and can also increase market share.
Struggling but viable businesses that need a bit of financial assistance can turn to specialist debt and equity finance companies to turnaround. To effect a turnaround, companies need to identify and acknowledge problems first, followed by making changes in management, and developing and implementing a strategy that works. As such, turnaround finance can only help companies that have a proven business model and a history of profitability or a stable revenue.
This funding solution is useful for businesses with temporary problems caused by cash flow disruptions or credit restrictions. A few examples of such problems include significant decline in stock price, losing a major client, delayed creditor payments and salaries, layoffs, etc.
Because banks have strict criteria for approving loans, small business owners can find it difficult to raise funds for their company if they choose to go the traditional way. On the other hand, alternative funding solutions have easygoing credit requirements and flexible terms that can be tailored to meet individual needs.
Alternative lenders also work with companies that have gone through ups and downs, so if your business has been doing well on an average, you’re sure to get an approval. Another reason to opt for alternative funding is that the application process is faster and you don’t have to wait for a long time for funds.
So don’t make the mistake of assuming that a bank loan is the only solution to your business needs; interest rates offered by banks may be attractive, but that doesn’t mean a traditional loan is the right financial solution! Instead, use the information provided here and choose an alternative funding option that works for your business.
This article was written by James Murray, who is a freelance writer. He enjoys writing about small business financing or alternative business financing tools on websites like San Diego Business Financing and Primary Funding.