If you’re an entrepreneur or a small business owner, you may be wondering how you can get funds to purchase new inventory, upgrade your equipment, or expand to a new location – particularly if you are having difficulty qualifying for a traditional small business loan.
In this article, we’ll explore 3 of the best alternative financing options for your small business, so that you can get the working capital you need, without a traditional bank loan. Let’s get started!
- Invoice Factoring
Invoice factoring is a common alternative financing option for companies that work with large corporations or government organizations, and who have large volumes of invoices that have not yet been paid. Essentially, invoice factoring allows a company to get paid immediately for invoices – so you don’t have to wait 30, 60, or 90 days for your clients to pay. This means that you can maximize available cash flow.
You’ll find an invoice factoring company. Then, you will sell your invoices to that company, which will pay you about 80% of their value immediately. Then, your clients pay the invoice factoring company. When their invoice is paid in full, you will receive the remaining 20% of your money – less the fees charged by the invoice factoring company. As long as you have plenty of creditworthy invoices and a large enough monthly revenue stream, invoice factoring can be a good option.
- Merchant Cash Advances (MCAs)
Merchant cash advances (MCAs) are a method by which you can take out a business advance based on your future sales. When you take out a merchant cash advance, you get a lump sum that you can use however you want. Then, this lump sum (plus fees and interest) is repaid through your daily credit card sales. The lender usually takes somewhere between 3-10% (this may vary) of your daily credit card sales. Over a period of about a year, you’ll repay the business advance by sending this money directly to the lender.
Because repayment is income-based, this makes MCAs especially great for businesses with seasonal sales, or small businesses that need working capital to expand to a new location or upgrade their equipment. In addition, because MCAs are secured by future credit sales, they can be obtained easily, even if you do not have a high credit score. As long as you can prove a good cash flow with 3-6 months of credit card receipts, you’re eligible for a business cash advance.
- Business Lines of Credit
A business line of credit can be a viable alternative to small business loans. With a business line of credit, you can borrow money up to a certain limit – such as $10,000 – and only pay interest on what you borrow.
It’s similar to how a credit card works. You can borrow up to your limit, and pay the loan down each month, either in full or by making minimum payments. A business line of credit is ideal for paying for surprise expenses, or for managing your cash flow when you need to purchase new inventory.
Know What’s Right for You – And Your Business!
If you run a small business, it’s crucial for you to know what kinds of alternative financing options are out there. So, know what method is right for you, and how you can use each of these three financing options to build a better business!