Guest post by Sara Mackey
With commercial banks and other traditional lending organizations cutting significantly back on financing small business, other alternative and non-traditional funding has become a necessity when considering your business model. By exploring the different types of alternative business financing options available, you can be sure that you are choosing the best choice for your small business.
Government or SBA-backed Loans
Both federal and state governments have programs guaranteeing micro loans for startup small businesses. These programs work much the same way as the Small Business Administration does. They do not provide the financing in and of itself, but it does back your loan which makes you a more attractive borrower for lenders. Micro financing is a viable solution for business that need seed money, to increase their cash flow or for businesses that do not qualify for a traditional bank loan. There are also grants available through federal, state and local governments for small businesses.
Angel investors are private entrepreneurs using their own funds to finance a business in the form of an investment. Angel investors are often more patient and willing to make longer-term investments than other types of financing. Angel investors usually assume partial ownership of the business which may seem like a downside to some, but they also bring in their business connections and can offer an already established network.
If you already have an established business, you may be interested in funding your financial need with your assets. Asset-based financing is obtained through collateral using your assets such as fresh account receivables, real estate, equipment or inventory. Many lenders tend to look more favorably at providing financing for receivables as they can be liquidated faster than other types of assets. This is an optimal option when you have your business model in place.
Factoring is similar to asset-based financing with account receivables, but rather than getting a loan based off their worth, they are sold to a company (known as the factor) for cash. The factor buying the receivable is then responsible for collecting on them. This takes the risk out of obtaining a loan using your assets and gives you more control over which ones and how many to sell.
According to the National Small Business Association, over forty percent of small businesses use credit cards to meet their financial needs. Credit cards are easily accessible, available when they are needed and can strengthen a business’s credit score when the payment terms are met. However, if you are already struggling to pay the company bills, a credit card is the last option you want to use. Beware of taking on too much debt that deviates from your business model.
Merchant Cash Advance
A merchant cash advance provides funding based on future credit card sales rather than past credit history. The funding is repaid through a percentage deducted from each credit card transaction. While the interest rate tends to be higher on a merchant cash advance than traditional small business loans, it is still a great option for many small businesses.
While there are many other types of non-traditional financing available for your small business, these are the most common options and can provide the working capital your company needs.