The requirements that a small business must meet to get financing from traditional lenders are challenging to achieve, particularly for startups. Often, business owners have to go through a drawn-out process, in addition to providing collateral before they can get the much-needed funds for their businesses. The credit score also comes into play, and a business owner must prove the ability to repay the loan without any difficulties.
However, business needs such as challenges with working capital won’t wait for you to build your creditworthiness before getting financing. Fortunately, there are other alternative financing options you can look at and get quick financing without as much hassle as with traditional lenders. Look at these six alternative options for financing your small business:
1. Merchant Cash Advances
This is one of the quickest ways to get financing as a small business, although relatively expensive compared to most other financing options. In merchant cash advances, the financier offers you a lump sum amount and then recovers the sum. Typically, the cash advance buys the merchant rights to a percentage of your sales.
For instance, if you get a business cash advance from Credibly or any other merchant, you’ll need to give them a portion of credit or debit card sales until you pay the advance in full. It’s a convenient but relatively expensive way of acquiring financing for your small business. Using a merchant cash advance is an excellent financing option if you’re struggling with bad credit or can’t qualify for other financing options available for small businesses.
2. Invoice Factoring
Another alternative financing option available for small businesses is invoice factoring. It can be a quick solution to cash flow problems in a business. In essence, you’ll be selling your unpaid invoices or account receivables to a factoring company instead of waiting for your clients to pay. The application process is usually straightforward and takes a short time to process.
There are two common ways to factor in your invoices: recourse and non-recourse. Your business will have to buy back all the invoices that the factoring company couldn’t collect from your customers in recourse factoring. On the other hand, the factoring company assumes all the risk in non-recourse factoring.
3. Peer-To-Peer (P2P) Lending
P2P lending happens over the internet between the lender and the small business and eliminates the need for intermediaries. This quality makes this type of financing quite appealing to many small business owners. The transaction happens through a P2P website that connects borrowers to investors in an easy and hassle-free process.
However, like many other types of financing, including when taking personal loans, your financial credit score needs to be in good shape if you are to qualify for P2P funding. All you need is to research on a reputable P2P site and register.
4. Purchase Order Financing
This alternative financing method is similar to invoice factoring, except that you use outstanding purchase orders. You can use your purchase orders to get financing from a lender by advancing you money to cover costs associated with the order. To benefit most from this type of financing, you need to have a large order from a reputable customer.
It also helps if you’ve already signed an agreement with your customers such that it’s almost certain that the order will go through. However, ensure you have clear terms on costs and fees with the financier. You don’t want to receive unpleasant surprises when the financier gives you their charges.
5. Business Line Of Credit
A business line of credit gives you access to a predetermined amount of money, typically based on your company’s cash flow and credit rating. This type of financing is more like using a credit card than taking a loan. You don’t have to use the credit line until you need it, and you won’t be charged interest on any funds you don’t utilize.
You’ll be required to start making payments immediately after borrowing the funds. As you pay the debt, your credit line is replenished. This means that as long as you can borrow and repay, you’ll always have access to the available funds within your limit.
6. Small Business Grants
Grants for small businesses allow business owners to start or expand their businesses without worrying about repaying the money they receive. Government agencies, nonprofits, and corporations often target and offer grants to specific types of businesses or specific industries.
Businesses that don’t have access to traditional debt financing can benefit from small business grants. Free funding has the drawback of being sought after by everyone. Finding and applying for grants is a time-consuming process, but the results could be worth the effort in the long run.
The requirements by traditional lenders before financing small businesses can lead to more of them missing out on the much-needed funds to grow their businesses. Alternative financing options are a game-changer. Business owners now have a new way to get cash, bypassing traditional lending sources. Channels like those discussed above allow small business owners to get financing when they need it most.