New businesses and those with bad credit may have difficulty securing financing for operation and growth. Learn how to get alternative business financing without a bank.
One of the biggest hurdles small business owners face while running their ventures is being able to secure adequate financing at critical moments for operations and growth. Many banks and commercial lenders are often reluctant to invest money in smaller companies- especially if the company has just opened for business, is struggling with poor credit, or is within a high-risk industry, such as retail. Add to this an adverse economic environment and the chances that a small business will receive commercial financing are very slim indeed.
But business owners should not despair. There are several fast unsecured financing options available to small businesses. Just a word of caution, however: there is a lot of predatory lending going on these days and business owners should make sure that the people or companies they will be working with are reputable.
Taking on a Business Partner
As the old saying goes: two heads are better than one… and so are two sets of pockets. Business owners looking to increase their asset pool can have someone invest in their company by becoming part owner in it. The investor can be either an active partner or a “silent” one who is not involved in the business’ daily operations. But all partners in the business should make sure to write a formal, legally-binding agreement detailing the nature of the partnership as well as what will happen in the event of a partner buyout.
Financing the Business’ Accounts Receivables
With accounts receivables financing, a business uses its outstanding invoices to as collateral for funding. In this case, there are two options: either a business can finance its customer invoices or factor them. With accounts receivables financing, the business receives a short-term loan against its outstanding invoices at a rate of 65% to 85% of the invoice’s face value. The financing company does not own the invoice under this arrangement and does not assume responsibility for collecting the outstanding debt.
With accounts receivables factoring, the lender assumes responsibility for collecting the outstanding debt from customers. Typically, lenders will provide financing that ranges from 70% to 90% of the total value of all outstanding invoices. Upon full receipt of payment from the customer, the lender will return the remaining balance, minus a small processing fee.
Quick Financing with a Business Cash Advance
Business or merchant cash advances are an offshoot of receivables financing based on future credit card sales. In this case, the lender purchases a portion of the business’ future credit card transactions at a discount, the rate of which is generally based on the business’ sales volume and history. To receive a cash advance, a business must be operating for three to six months and must process a minimum amount of credit card sales (around $3,000 a month). Many lenders provide a short online application that can be reviewed within 24 hours. Upon approval, most lenders can send the money within a week. The borrowing business receives an instant lump sum of capital, while the lender collects a fixed daily percentage of the business’ credit card sales until the debt is paid in full.
Subletting or Renting Out Property to Increase Income
Businesses that own real estate or other kinds of valuable assets, such as equipment, may be able to rent out their property to another party. This will help reduce overhead expenses and can be a good additional source of income. Some commercial real estate rental agreements may also allow commercial renters to either share or sublet available space.
Business to Business Bartering to Improve Cash Flow
Business bartering, or the direct exchange of goods and services, can help small businesses to improve their cash flow by providing them with the opportunity to unload unwanted inventory and to make use of valuable assets and resources during an off-season.
For extensive access to goods and services, small business owners should consider joining a business bartering exchange. In an exchange network, a business can offer goods or services to another party in exchange for trade “credits.” This credit can then be used to acquire appropriate goods and services from any other company within the network.
Peer-to-Peer Lending for Small Business Loans
With peer-to-peer, or P2P lending, financing occurs directly between individuals or “peers” without the involvement of a financial institution. Companies such as Prosper.com monitor an online marketplace where borrowers post their loan requests and are connected with lenders who “bid” on the chance to finance the loan. P2P business loans are usually limited to $25,000, and defaulting on P2P payments will negatively affect a business’ credit profile.
In short, though business owners may have a hard time securing a loan or a line of credit from traditional banks and lenders, all is not lost. There are other ways a business can get the financing it needs to thrive.