To anyone who has been denied a bank loan for a small business, it may seem that the proverbial window of opportunity has closed. However, for those who are determined to get off the ground, alternative business financing can be a feasible solution.
Several types of alternative financing are available to entrepreneurs, including factoring, commercial credit lines, advance pay programs, purchase order financing, and supplier guaranteed lines of credit. However, it should be noted that even these widely accepted alternatives have risks, including higher interest rates attached to private and commercial finance lines, and reduced realized profits − primarily with factoring loans and cash advances paid against Visa or MasterCard merchant account receipts.
In light of the ongoing credit freeze at traditional lending institutions, social networks, like GoBigNetwork.com and Prosper.com have become popular funding resources as they encourage peer-to-peer lending and act as a speed dating service of sorts for investors and entrepreneurs.
For existing businesses, the most common financing alternative is a merchant cash advance program. It works like this: an established business receives an advance, or loan, from the lender and pays off the borrowed amount by automatically routing a percentage of credit card transactions directly to the lender.
For startups, options generally are limited to building business credit and establishing a joint venture, as they lack revenue or any other form of collateral that lenders can collect if the venture goes south.
Every business’s predicament is different, so it is important to weigh the risks associated with each finance option and how they can affect your bottom line.
In regard to credit card advances, if the 7 percent to 15 percent a lender requires for each card swipe still nets your business the revenue it needs to remain profitable, then accepting a loan to get you through a rough spot could be a viable solution. Similarly, if receiving a loan for 70 percent to 80 percent of your accounts receivable balance will bring your books out of the red, then the risk of having your profits eaten up may not seem high.
There are three primary factors to consider when looking into alternative small business financing:
- • The first is the total cost of the financing you are seeking. Beware of hidden fees and other charges that may not be disclosed by lenders early in the application process. Fees, added to the amount financed upfront, typically don’t appear until closing.
- • The second is how financing will affect your taxes − something that often is overlooked but a crucial consideration. If realized late in the decision making process, a business owner may not be able to save on taxes through appropriate deductions and annual renewals.
- • The third factor is how financing will impact your small business credit score. Think about how much a loan will actually cost over time, the effect it will have on overall debt-to-income ratio, and how others may view the business’s profitability.