When starting a small business, most entrepreneurs who are new to the business ownership arena find finance to be the most challenging aspect. Banks have been the most traditional source of loans, however, not all of them look forward to having small businesses as their clients since they are not certain that they would get their funds back.
As small businesses began to boom, alternative business financing sources emerged on the scene. They gained in popularity because of a more modest list of requirements as well as a shorter period of waiting for access to the funds. With that in mind, here is a list of alternative sources of funding for novices in the entrepreneurial world based on different business needs.
Minimizing payment terms
If you require a loan to be paid off between 3 to 36 months, then short-term loans are the perfect choice for you. In general, short-term loans often take less time to be approved so they come in handy when you need to jump on an opportunity quickly or when you need capital to conquer a minor issue. However, since these installments are daily or weekly-based, that can put a strain on your overall cash flow.
Prolonging payment period
Small businesses whose budget plans cannot sustain a short payment period but which also don’t want to tie themselves for 10 years should consider medium-term options. They are usually between 2 and 5 years and still get approved faster than long-term ones. You can opt for monthly or bi-monthly payments but make sure you read the small print and go through everything in detail since they often include prepayment penalties.
Leveraging on unpaid invoices
When conducting business, most companies allow their clients to pay for the goods and services in installments. However, this could be detrimental to their cash flow as you may not have enough funds to grow your business. This is where invoice financing comes to play, where the lenders advance your business with a percentage of the total sum from the invoice. This type of short-term loan is convenient because you manage to respect your clients and develop your business at the same time.
If you need funds quickly and don’t have time for estimates to your creditworthiness, then merchant cashadvances might be the solution for you. This loan is approved and at your disposal on the same day and it is paid back through a percentage of credit card deposits. On the downside, the fees are high and it can choke your cash flow which means that taking advantage of future opportunities cannot be as spontaneous as it used to.
Excluding the collateral
Most small business owners are reluctant for personal assets to become the collateral, as they usually are because they might lose them if they fail to return the loan on time. This is why entrepreneurs often go for an unsecured business loan plan since no collateral is needed, the application process is simple, payment terms are relatively short and it gets approved quickly. As most alternative funding sources, they are not suitable for larger sums but in that case, you would probably go straight with a long-term loan.
Prioritizing inventory acquisition
Since manufacturers and dealers of consumer products value their inventory significantly, inventory financing is the preferred type of funding. Inventory financing allows them to acquire new inventory or to repay suppliers faster. The inventory is funded by lenders who advance either 75% of its appraised value or 50% of its cost, depending on what is the lowest. On the flip side, due to the nature of inventory and the need for additional financing control, the review process of the inventory can be quite expensive.
Putting equipment purchase first
If you need to acquire equipment for your business, instead of a traditional bank loan which, as mentioned, takes longer to get approved, you might want to think about equipment financing. The loan covers the cost of the equipment in its entirety, and you will pay fixed monthly interest rates which are between 8 – 30%. As for the duration of the loan, it can match the expected lifetime of that piece of equipment or a maximum of 10 years.
Relying on revenue
Businesses with a high gross margin might find revenue-based financing a suitable funding method because the payment is based on a percentage of their monthly revenue. This loan is suitable for hiring more employees, different marketing and sales projects as well as product development. This means your revenue is closely monitored and expected to grow rapidly which makes the repayment term difficult to assess – the faster your business develops, the faster you repay the loan.
If you need a new property, then hard money loans are the solution for your business. The term is usually 1 year but it can be 2-5 years. In this case, lenders are concerned with the property’s value and that is how the decision on the amount is made. This solution secures funds for you in around a week’s time.
Before you decide on the alternative source which would match your business needs best, make sure you consider all requirements and read all the fine print. This is how you will strike the perfect balance between the payment terms and installment amounts.
- Pros and Cons of Financing a Business
- 12 Tips for Getting Your Bank Loan Approved
- Evaluating Financing Options for Your Business: Myths and Facts
- Why You Can’t Get a Bank Loan for Your Small Business
- Types of Business Loans for Small Businesses