A Beginners Guide to Alternative Financing

A Beginners Guide to Alternative Financing

Have you had your working capital stymied by repeated loan application disapprovals? Being rejected for conventional loans can be an irritating yet normal occurrence for small and medium enterprises. Your limited cash flow and working capital, as well as the absence of a credit record, make you an unlikely candidate that qualifies for traditional financing.

However, financing is also very necessary for businesses of all sizes. For instance, you will need someone’s help in financing business acquisitions when you decide to expand your business. Another situation where financing is needed is buying new equipment. Since it’s difficult for SMEs to qualify for ordinary loans, where will that money come from?

Fortunately, SMEs do have access to alternative forms of financing. These loans have different qualifications and requirements from those that are offered by banks. Some of these don’t even require a credit record. Others don’t even impose minimum income requirements. They are designed to make it easier for businesses with bad credit or those with low income to access financial help when needed.

Let’s take a look at a few of these alternative sources of financing:

Small Business Administration (SBA) Loans

The SBA loans go on top of this list because of their high borrowing amounts and comfortable repayment terms. The government, through the SBA, guarantees these loans. This guarantee reduces the risk for individual lenders and, at the same time, allows them to charge borrowers lower interest rates. SBA loans also have longer repayment terms than most alternative financing schemes.

There are three types of SBA loans available. These are:

·         Microloans

Microloans offer borrowers up to $50,000 that can be used to raise additional capital or to build a business up from scratch. These are available from community organizations accredited by the SBA.

·         504 loans

504 loans provide up to $5 million in cash. These funds can be used for vital business acquisitions, like equipment, real estate, and other companies. They can also be used to support the improvement of existing properties.

·         7(a) loans

7(a) loans let small business entrepreneurs borrow cash for debt refinancing, adding working capital, and acquiring office supplies. Like the 504 loans, 7(a) loans also offer up to $5 million to eligible borrowers.

Each SBA loan has its own set of eligibility requirements. However, all of them require applicants to be a for-profit business that meets the Administration’s definition of a small business. The company should also be based in the United States.

Invoice Financing

Invoice financing is very popular among small businesses. This is how it works. You send invoices that are yet to mature to a factor and advance money against these receivables. You hand over your invoices to the factor and receive a percentage of their total value as a cash advance. The factor will collect on the invoices for you upon maturity and forward the balance back to you.

One benefit of invoice financing is it does not require your company to maintain and present a good credit record. Your invoices are cash that only needs to be liquidated in the future and can provide factors or lenders with a solid guarantee of getting paid. Factor companies, however, may want to check the creditworthiness of your customers.

Invoice financing is very advantageous for businesses that need quick cash and are simply waiting for their clients to pay their obligations. They can get up to 90% of the value of the invoices upfront. Factors forward the remaining 10% minus a factoring fee once it collects the receivables. The factoring fee is a small percentage of the remaining balance that the factor keeps as payment for its services.

Equipment Financing

Many businesses rely on specialized equipment to provide services. Restaurants, for example, need special ovens and burners to prepare gourmet meals. Construction firms need backhoes, bulldozers, cranes, and payloader trucks to break the ground in preparation for building. These gear experience extreme stress and could break down due to wear and tear.

Over time, these machines may need to be replaced. No matter how financially healthy a company is, it is never a good idea to pay for this equipment in cash. Equipment financing lets you, the entrepreneur, extend the payment over several months or years. This way, your business can preserve its cash flow and working capital.

To qualify for equipment financing, you must demonstrate to the lender that the utilities are crucial to your income-generating activities. The lender will cover the full value of the equipment and pay the vendor for you. All you have to do is to take delivery of the machines when they’re paid for and ready.

Equipment financing is a secured loan. However, instead of asking you to pledge an existing asset, the equipment that the lender will finance becomes the collateral. Lenders will not also ask for a down payment in most cases.

Business Line of Credit

A business line of credit provides entrepreneurs with a ready source of working capital that they can draw on at need. They work the same way as credit cards, but without the card. When you need to borrow money, you can withdraw from your account and repay the loan later on.

The main advantage of a business line of credit is flexibility. Businessmen don’t need to borrow the entire amount if they need only a part of the total. They get to keep the remaining balance for use in the future. They only pay for what they have borrowed, and they can even choose to pay the full amount or a predetermined minimum.

Business lines of credit only require a one-time application. Once approved, the entrepreneur can access their accounts anytime and borrow money without going through the process again.

Key Takeaways

With these alternative sources of financing, small business proprietors no longer need to worry about their loan applications being declined. There is a form of financing created specifically to address a particular business expense. 

Entrepreneurs only need to educate themselves on their various options ahead of time. When the moment of need comes, they can save themselves from the stress of scrambling for financial assistance. Prior knowledge simplifies the process because they already know where to go.

Recommended Articles