Alternative Funding Sources for Small Businesses
As business credit has tightened in the banking sector, small business owners have found it more difficult to obtain loans from traditional lenders. This has spurred the rise of non-bank lenders, also known as alternative lenders.
Below are some resources to help you understand more about alternative funding.
The Small Business Administration’s Microloan program provides loans up to $50,000 to help small businesses. The average microloan is about $13,000.
- Small Business Administration Microloan program
- A simple guide to microloans
Peer to Peer Lending
Peer-to-peer-lending (P2P) involves sharing your idea to other people in hopes they will invest in your business. Websites connect people who want to lend money with those who need to borrow money – often in increments as low as $25. You determine how much you need to borrow, define the purpose of the loan, and post your listing online.
- Crowdfunding in Washington State
- P2P Lending and Crowdfunding: Explore the new frontier for small business lending
Peer to peer lending – a source of small business financing
Merchant Cash Advances
A Merchant Cash Advance is a type of funding where the Merchant Cash Provider purchases a fixed dollar amount of a business’s future credit and debit card receivables. No regular fixed payments are required by the company. The lender collects a set percentage of the company’s daily credit/debit card sales. The collection continues until the lender recovers what they advanced to the company along with their premium.
- How merchant cash advances work
- Merchant Cash Advances as an alternative source of small business financing
- NY Times: What you need to know about Merchant Cash Advances
Invoice Factoring or Accounts Receivable Factoring
Companies facing cash-flow problems and slow-paying customers may sell their invoices or accounts receivable to specialized companies called factors. The factor company advances most of the invoice amount (70-90%), after checking out the credit-worthiness of the billed customer. When the invoices are paid, the factor remits the balance, minus a transaction (or factoring) fee.
- How to use Factoring for cash flow
- All about factoring
Purchase Order Financing
Purchase order financing is a loan for businesses that need cash to fill single or multiple customer orders. Purchase-order financing provides short-term capital to cover the cost of manufacturing and shipping hard goods.
- Purchase order financing – an alternative source of business financing
- Can a purchase order loan keep your business growing?
- Land a big customer? Here’s how to finance it
Crowdfunding is a relatively new option. It involves financing a business venture by raising cash contributions from many individuals, typically through the internet.
- What is crowdfunding?
- Crowdfunding in Washington State
Equipment loans offered by lenders allow you to finance up to 100% of the value of machinery, vehicles or other equipment your business may need. The financing company typically pays the equipment maker directly, and then you repay the financing company.
- Guide to equipment financing
- Leasing business equipment: An alternative
If your business produces products and has inventory, an inventory loan may be available to you. Inventory financing allows you to secure your loan with inventory your business produces.
- Financing your business with your inventory
- Inventory based loans: How one company deals with a cash flow problem
Asset Based Loans
Asset based loans are based on the collateral (accounts receivable and inventory) that a business has to secure a loan. This makes asset-backed loans more suitable for businesses with lower credit scores.
- Asset based loans as a source of business financing
- The ins and outs of asset based loans
Don’t Forget: Term Loans
Term loans are the most common form of business loan. You borrow a fixed amount of money and pay the loan back over a fixed term, often with a fixed interest rate.
- Washington State Department of Commerce – wa.gov
Helps entrepreneurs obtains financing for start-up and expansion projects.
- Small Business Administration – sba.gov
The U.S. Small Business Administration delivers loans, loan guarantees, contracts, counseling sessions and other forms of assistance to small businesses.
- Business loans – What lenders look for and how to win them over – https://www.sba.gov/blogs/business-loans-what-lenders-look-and-tips-winning-them-over
- 13 must know terms when applying for a business loan – https://www.score.org/resources/13-must-know-terms-when-applying-loan