With economic uncertainty comes a restriction on lending practices. Fortunately, banks are not the be-all and end-all of commercial financing. When traditional lending institutions fail to provide, many businesses turn to alternative financing strategies to give them the financial flexibility they need.
While not always as favorable as a conventional loan or line of credit, these forms of financing tend to be more accessible and can be the most surefire way of meeting a business’s needs in a pinch. Yet many business owners are unaware that such options exist. So what are some of the most popular alternative business credit and financing strategies?
The Small Business Administration (SBA) participates in a number of lending programs that are tailored to businesses that have difficulty acquiring traditional bank loans. The SBA guarantees a portion of these loans, promising to pay back the lender the guaranteed amount should the loan recipient default. This makes these loans more appealing to lenders as it mitigates the financial risks associated with less established businesses and expands their availability beyond candidates that banks would typically consider as viable loan recipients. Applications for these programs can be found at participating local banks and lending institutions.
Factoring is an arrangement whereby a company sells its unpaid invoices (accounts receivable) to a factoring agency at a reduced rate. Factoring gives the seller cash up front, while the factoring company turns a profit collecting on these invoices. This can be a helpful solution for businesses with cash flow problems or that otherwise need a quick infusion of cash to take advantage of an unforeseen opportunity.
Leaseback options entail selling equipment or property and then leasing it back from the buyer. Transferring ownership in this type of arrangement can, as in factoring, assist in solving cash flow problems by leveraging existing assets (in this case property, rather than accounts receivable).
Merchant Cash Advance
A merchant cash advance is a lump sum payment to a business in exchange for an agreed upon percentage of future credit and debit card sales. This comes out of the business’s daily transactions directly from the credit card processor that settles these payments until the obligation is met.
Peer-to-Peer Lending Networks
Crowd-sourcing has lately become one of the most popular alternative financing options, allowing loan seekers to circumvent traditional lending institutions. Kickstarter.com is perhaps the most well known of these, offering funding to artists via individual donations, but there are options for small business owners as well. Prosper.com and LendingClub.com are two popular avenues for loan seekers and individual lenders to arrange financing agreements. While this effectively takes banks out of the picture, success nonetheless remains largely dependent on credit ratings.