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A Small Business Owner’s Guide to Alternative Lending Options

The Best Non-Bank Alternative Financing for Small Business Owners

Small Business Loan Alternatives to Improve Working Capital

When a business is either unable to secure a small business loan or does not want to assume the risk associated with doing so, it must consider the alternatives to bank lending that will allow their company to operate as effectively as it can. Fortunately, there are many other ways that a company can acquire money, even if their credit is bad. There are multiple routes that a business can take when it needs to spend money in order to make money, and choosing the right lending strategy can be one of the most important things for a growing business to do. Here are 10 of the best bank loan alternatives for small businesses on the market.

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Credit Unions

Small businesses and individuals who are seeking funding for a project often feel as if banks are taking advantage of them. As a result, they seek non-bank business financing options that can provide them with the money that they need at better rates and with more apparent good intention. Credit Unions are great places to go for alternative business loans, as they essentially function as cooperative banks (see our page on different business structures for more information). The not-for-profit status that they are granted is beneficial to both the Credit Union and its members, as it allows for certain tax exemptions on the Credit Union that banks do not have along with subsequently less costly borrowing rates and better interest on savings. In addition to being able to do what banks do in a better fashion, being a member of a Credit Union allows an individual to have a vote in its management process and sometimes even provides them with educational opportunities so they have the best handle on their finances that they possibly can. Unfortunately, as cooperatives, Credit Unions are only accessible to the people in the group or community that the Credit Union was designed to serve, so not just anyone can join and begin reaping the benefits. Look into the Credit Unions around you to see if you qualify for membership at any of them, and if so, consider using a Credit Union as your source of alternative small business funding.

 

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Credit Line

By opening up a credit line with a financing firm, a company will be setting itself up to have available funds whenever they are needed so that they don’t have to continue taking out more and more single loans. In fact, this bank loan alternative is potentially the best one available for businesses who are not entirely sure when they might need money to cover costs of operating. Although credit lines have a monetary limit and due dates when the debt must be paid off, they are great when a business is just starting out and there are still too many unknowns for other alternative business lending types. So long as the business has decent credit and does not have any problems paying back debts in set increments of time, they should consider opening up a credit line. The main setback to consider when thinking of doing so is the fact that there is not a lot of due date flexibility. Otherwise, the financial flexibility of this option is a great alternative to banks for small business lending.

 

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Community Development Financial Institutions (CDFI)

Another form of nonprofit lending organization is a CDFI, which is funded but not run by the government. These NGOs attempt to stimulate growth in poverty-stricken or badly developed communities by providing loans and funding to businesses who are working in these areas. The fact that they are funded by the government means that rates are better than they would be at banks, and that the organization is more concerned with helping businesses further community prosperity than turning a profit. CDFIs are undoubtedly one of the best business financing options for startups who qualify for the help that they are able to provide, as they are able to focus their energy and momentum on bettering the neighborhoods in which they are located. CDFIs are a great small business loan alternative for companies that don’t want to have to worry about a bank breathing down their backs as they attempt to get their businesses in motion.

 

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Microlending

Of all the various tools and opportunities that have arisen because of the development of digital finance, microlending is perhaps the most useful to small businesses because of the alternative business funding opportunities that it provides. On microlending websites, people who are hoping to make a profit will lend small amounts of money to business or project and eventually receive their money back plus interest. Because of the lower amounts in which lenders are giving money, projects on microlending websites are usually funded by a lot of people. Unfortunately, this means that microlending can be somewhat risky as the loans are also not protected against default. Subsequently, interest rates are higher to account for higher risk. Even with this in mind, however, if a person or business is in need of some assistance in financing their pursuits, they should take a look at this business loan alternative, which is beneficial for people on both sides of the transaction.

 

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Invoice Factoring

Invoice factoring is a great alternative business funding method for companies who need cash but either cannot take on a loan or do not want to take on a loan. Even when a company possesses the invoices from a sale, they still must wait 30 to 90 days for that invoice to become cashable. As a result, they may be strapped for cash (for payroll, overhead sales costs, bills, etc.) but unable to access the money that is rightfully theirs. To solve this problem, factoring companies buy the invoices from the business, giving them an advance on cash that they otherwise would have had to wait for. Once the factor purchases the invoice, they advance the business owner between 80%-95% of the invoice amount. The remainder is held in a reserve account until the invoice is paid by the customer. Once the invoice is paid, the factor releases the rest of the money minus a small fee. This form of alternative lending is good for companies who have bad credit or do not want the risk of loans but need cash as soon as they can get it. While factoring fees are higher than the interest rates on a loan, the added benefit of instant cash with virtually no risk (so long as the business’s client doesn’t default) is well worth the cost.

 

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Merchant Cash Advance

Another small business financing option for people with bad credit is a Merchant Cash Advance, which puts money in the hands of businesses who can incrementally pay back their lender via online or daily credit card payments in the future. This strategy is usually used to bring in smaller amounts of money than might be needed in the case of a bank loan, but is also more costly than a traditional bank loan. Even so, because credit ratings are pretty irrelevant in determining whether or not a business can get an MCA, they are one of the best business financing options for businesses with bad credit ratings. One setback of using merchant cash advances is that they can take a cut of daily profits, meaning that there is not a ton of flexibility when it comes to paying back at a convenient time. With that being said, the amount paid is a percentage of daily profits, so a business having a rough week won’t have as big a fee. Businesses who know that a small cash boost can help their business begin to profit enough to justify the daily payments should consider merchant cash advances to be a prime alternative financing option.

 

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Revenue-Based Financing

A more risk-averse, non-bank financing strategy for businesses who would rather not take on a loan is Revenue-Based Financing, a form of alternative lending that is fairly similar to Merchant Cash Advances. A business that uses funding from an RBF firm will have access to the money that they need in the moment, but will pay back their debt at a rate that is dependent on their month-by-month success. In a month that the company does poorly, the RBF firm will take a smaller portion of the total profit to ensure that the business does not go into debt or fall apart as a result of the money that it owes. On the other hand, in a good month the RBF firm will take a larger percentage of the money, meaning that a very profitable period of time for the company will actually be less of a cause for celebration than it might originally seem. Nevertheless, RBF is a great alternative financing option for businesses that are worried about not being able to pay what they owe due to the rough waters that might lie ahead.

 

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Purchase Order Financing

When a company is just beginning and has no capital or is an established business that simply doesn’t have any available cash, Purchase Order Financing might be the best alternative funding option. When a company receives an order from a customer but cannot pay for the item to be produced in a factory and shipped to them so that they can distribute it to the customer, a Purchase Order Factor will buy the purchase order from the company so that the order can be filled. Once this happens, they take the money that they spent on the purchase order back plus a fee, and the remaining money is given to the original company. This alternative financing option is helpful for companies facing the unfortunate Catch-22 that so many businesses find troubling toward their beginnings: that a company needs to do business to make money, but needs to make money to do business. For this reason, PO financing can be the very thing that allows companies to get to a place where it is no longer necessary to take on costly lending burdens in the long term.

 

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Lease-Back Program

When a business owns property (land or actual items) that are of some value, they can benefit from a bank loan alternative known as a “lease back program.” When two companies X and Y sign a lease-back contract, company X sells the agreed upon property to company Y and then immediately leases the property back, meaning that company X has made a profit and is now slowly giving money back to company Y in exchange for renting the property that Y now owns. When X has made sufficient money, they might buy the property back from Y so that X was able to save money in the short term when they had none and Y made a long term profit. If X opts to not buy the property back from Y (which they often have pre-determined in the contract), X will have hopefully saved money off of rental and Y will now own a product that they can sell or continue to lease elsewhere. This strategy works for companies that use machinery and are expecting to make money in the future, or know that they will only need the machinery for a limited amount of time going forward. It is important that the contracts in a lease-back agreement are very solid so that both parties hold up their end of the deal and do not cause the other party to sustain a large loss. If the paperwork is done properly and both firms have accurately judged what will benefit them the most, a lease-back program can be a great alternative financing option for small businesses.

 

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Crowd Funding

Crowd funding is the bank loan alternative that puts the most strength in numbers as opposed to relying on a single entity like a loan business. On websites like kickstarter.com, individuals or businesses can post their projects and ideas along with a monetary goal, and people around the world can then donate small or large amounts of cash to the cause. These platforms sometimes offer incentives (free product demos, a slight return on investment) but are often based upon the idea of donation in the name of ingenuity. The main setback of crowdfunding sites is that the owner of the business or product requesting crowdfunding will not receive a single cent if the funding goal is not met. This means that there is a lower degree of risk for businesses that do not offer a donation incentive, but they will also likely receive fewer donations. Companies using crowdfunding sites must work out a strategy that will maximize the number of donations they get while minimizing potential losses. As long as the plan is well thought out, crowdfunding can be a great alternative option to bank loans for small businesses.

Choosing the Right Alternative Loan Option

When making the important choice of which alternative loan strategy to use, a business must consider each of their options carefully. What is right for one business might not even be right for another business in the same industry – differences in profit margin, willingness to take on risk, and ability to take on debt can all effect which one of these loan opportunities a business should opt for.

If your business needs money to cover expenses and needs cash right away but is unable to assume debt, Factor Finders can help you factor your invoices so that your business can move forward. Contact Factor Finders now or visit our website to learn more about factoring in your industry.

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