Authored by Phil Cohen
When a company needs money and the bank says no, it might seem like all hope is lost. Fortunately, there are alternative lenders who are willing to fund those who are rejected for traditional bank loans or lines or credit.
Ways for Small Businesses to Find Cash
Invoice factoring is a source of financing where a factoring company buys the unpaid invoices of businesses and then advances 70-90% of the value upfront. The remainder is kept as a reserve, which is paid back to the company less a fee when the customer pays the invoice. The factor handles the collections and credit checks on existing and new customers, and some firms offer back-office services like payroll and tax filing. Advantages of factoring are immediate access to cash and outsourcing collections, while the disadvantage is it is a relatively expensive form of financing.
- Credit Card Lending
Sometimes the owners of a new business choose to finance with credit cards. If they have good credit history, then the use of credit cards means easy access to cash. However, sometimes it is difficult for start-ups to establish good credit history and it is also a limited form of financing. In addition, rates are high and penalties can be steep for missing a payment.
- Lease-Backs
This form of financing refers to when a company sells its property, plant, and/or equipment, and leases it back for cash at the same time. It is best for companies with underutilized but valuable plant or equipment, and the cost includes monthly lease payments plus costs of the equipment such as depreciation and tax burdens.
- Hedge Funds
Hedge fund lender loan money to high risk businesses at a relatively high borrowing cost. They choose recipients based on due diligence, but are much more lenient than traditional lending institutions. The benefits of hedge funds include relatively quick access to cash and funding for businesses backed by assets or technology. Dangers include high costs and prepayment penalties, as well as morally questionable hedge funders doing due diligence just to get inside information.
Getting turned down for a bank loan is not the end of the world. Though financing differs based on many factors, there is usually another option for companies in need. These are just a few examples of alternative lending methods that a business could research when starting the search for new funds.