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Small businesses may find it a challenge to secure financing the old fashioned way. Consider these alternatives to see if they make sense for your business.

Funding a startup or securing a small business loan from a bank remains a challenge to say the least. But when one avenue shuts down, it seems that new roadways open up, at least according to Stephen Sheinbaum, founder and CEO of Merchant Cash & Capital, who firmly believes that small business owners have more financing alternatives today than ever before.

That can be a good thing in a challenging economy, especially for those who’ve been turned down by the traditional financial outlets. But everything comes at a price, and when you’re looking at quick access to cash, you can expect to pay more in interest rates. That’s the tradeoff, said Sheinbaum in an article on Small Business Computing. Alternative financiers accept a higher level of risk for a higher rate of return.

If you’re looking for alternate ways to fund your small business you might find these options, and the steps required to secure them, worth researching.

Alternative Financing Options for Small Business

1. Begin at the beginning

When you search for financing, start with your banker and a traditional loan first. Make sure that you know your numbers cold, that you provide a list of assets (including property and equipment), and that you can present a complete picture of your company’s financial situation. If you can’t, don’t count on scoring a loan.

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2. Borrow against expected income

If the traditional route shuts you out, consider purchase-order financing. It’s a short-term solution that lets you borrow on orders you’ve received, but have not yet fulfilled or taken payment on. This type of financing is particularly helpful if you’ve won a big contract, but you aren’t financially able to make good on it.

3. Cash-in on accounts receivable

Another option similar to purchase-order financing is called “factor financing.” It’s when an institution (or factor) lends you money based on your accounts receivable. For example, if you have a customer who owes you $100,000, you can borrow against that customer’s debt. Typically you’ll receive the funds faster than a traditional loan.

Of course to get the money, you’ll need to show that the customer who owes you has a solid payment history. It’s that customer’s financial standing that will primarily determine whether you get funded.

4. Lend me your peers

Attracted by returns that beat the sad interest rates associated with most savings accounts, some investors pool their resources and make funding available through an online application process. This is called peer-to-peer lending. The amount of interest you pay is based on your credit rating—again, the higher the credit risk, the higher the interest rate.

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5. Projected sales

Merchant cash advance is yet another alternative to traditional loans. These finance firms, like the one founded by Sheinbaum, extend funding based on your company’s projected sales. Once you apply and receive approval, the merchant cash-advance firm extends you the funding. You pay back the loan based on a percentage of the sales generated by your customers’ credit card and debit card purchases during the merchant cash advance’s term.

You’ll need to provide bank statements and merchant processing statements to demonstrate your ability to pay back the loan.

Lauren Simonds is the managing editor of Small Business Computing. Follow Lauren on Twitter.

Adapted from Small Business Financing Options, by Pedro Hernandez at Small Business Computing. Follow Small Business Computing on Twitter.

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2 comments
armcor
armcor

Informative article, but it omits factoring and asset-based lending options, which can be very viable options for certain businesses. And the suggested order of pursuit puts traditional lending and purchase order finance at the very top, when, in reality, these are difficult to obtain. On the plus side, P2P lending is included; this is a fast developing alternative that could become very important in this niche.

jeffpecor
jeffpecor

A number of small businesses are also tapping into an alternative funding source called Revenue-based Financing - a model that adjusts loan payments based on a percentage of the company's monthly revenues.  It's an ideal alternative for rapidly-growing companies that have no interest in personal guarantees from a bank, nor the dilution and control provisions from venture capitalists.  Lenders such as Lighter Capital will invest $50k to $1M in companies with revenue of $15k per month and up.