Small business owners face many situations in due course of time where they need an immediate funding solution. Banks are also not always interested in helping small businesses. In fact if they don’t meet the bank’s criteria and are not able to pay back, options are presented before them to sell their personal assets, use retirement fund, or borrow a loan against home or office.
However, apart from keeping your savings and property at stake, there are many different alternative finance solutions available for you to choose from. In fact in some situations these alternative solutions are far better than the traditional ways of meeting financial needs. Let’s go through 5 of such small-business finance solutions.
Table of Contents
1-Business Lines of Credit
Lines of credit are helpful for making payment for short-term expenses like purchasing equipment, expanding inventory, covering operating costs, etc. This mode of payment works quite similar to credit cards. You have access to a certain amount of funds that you can use as per your requirement. The financing company does regular payments and you can withdraw as much money as you require. The interest is charged only on the amount withdrawn. However, the interest rates on a business line of credit are slightly higher than prime lending rates, but lower than credit card rates.
You can use your assets to acquire funds. In asset-based lending, the asset financing company remains the owner of the assets until the last payment is made. There are two options- hire purchase and lease purchase. In case of hire purchase, the asset is shown on the balance sheet and in lease purchase; the asset stays off the balance sheet until you pay the full amount along with the purchase fees.
Invoice factoring is considered best for companies selling B2B services or products. Here invoices are issued to clients or customers and invoice copies are sent to the lender. After the lender receives the invoice copies, he pays a percentage of the invoice value to the company. When the full payment is received from the clients or customers, the lender pays the remainder of the invoice value to the company after deducting the applicable amount of fees.
4-Purchase Order and Trade Financing
It is a fast and flexible option. For a small business, the biggest challenge is to find the appropriate source of funding. If they go for purchase order financing, the producers, distributors, wholesale suppliers or distributors can grow their business without increasing bank debt or selling equity. The businesses are able to fulfill larger orders and make more profits, they can make timely deliveries and can also increase their market share.
There are specialist debt and equity finance companies to turnaround. To go for a turnaround, the companies first need to identify and acknowledge the problems, followed by making changes in management, and developing and implementing a strategy that actually works. Turnaround financing is helpful for companies that have a proven business model and a history of profitability or stable revenue.
The businesses facing temporary problems due to cash flow disruptions or credit restrictions such as significant decline in stock price, losing a major client, delayed creditor payments and salaries, layoffs, etc. can better go for this type of financing.
Above are the few finance solutions available for small businesses. The traditional ways of financing i.e. taking a bank loan is not always possible for small businesses. Banks usually keep strict criteria for approving loans for small business owners. In such a scenario, the alternative finance solutions come to their aid. These financing options have simple credit requirements and flexible terms that can be tailor-made based on the needs of the small businesses.
The alternative lenders work with companies that have previously gone through ups and downs. That’s why you can surely get funding if your business is doing well on an average. Another big advantage with alternative methods is that the application process is quite simple and fast. You need not have to wait for a long time period for receiving funds. Therefore, think and try to choose the option which is best suited to your needs.
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