What are some popular, alternative financing options for small businesses? Small businesses seek alternative financing when a traditional bank loan is not an option.
The world of alternative financing may be more vast and “mainstream” then you realize. Since the funding in this category is generally more accessible, alternative financing has been the boon of many small businesses that lack the collateral, good credit and business history needed to secure a “traditional” loan at the bank.
If you own a small business, and you are seeking additional capital, then you should consider alternative financing. However, keep in mind that while some options provide excellent opportunities for business owners to get the capital they need, other methods are more risky and should be used with caution.
First here are some popular alternative financing methods that you should either avoid or use cautiously:
With high interest rates, debts can spiral out of control, leaving you with a bad credit history that can hinder your chances of getting traditional financing in the future.
Bad credit business loans. There are many companies that will offer you a loan against your bad credit, but be aware that these loans carry very high interest rates (usually in the range of 20%). With these loans you are also more likely to encounter predatory lending.
Home equity lines of credit
No matter how sure you are of your business’ success, is it worth betting your house on it?
Cash in the value of your life insurance policy
Ask family of friends
Even if this is an option, money can put a strain on relationships. So while your business may be well funded, you may end up emotionally bankrupt.
So now that we have seen the bad and the ugly, let’s consider some more attractive methods:
This is an attractive option for small business owners who do not have enough capital to pay for the expenses of operating and expanding their company. By leasing their equipment, instead of purchasing it, businesses can free up their working capital and thereby take advantage of opportunities to expand or improve operations.
Taking on a partner
You can alternatively acquire funds by having someone invest in your company and become a partner. The investor can be either an active parter or a “silent” one who is not involved in the business’ daily operations.
If you are looking to start or buy a new business, then seller financing is something to look into. Sellers of small businesses generally allow the buyer to pay some of the purchase price of the business in the form of a promissory note. Sellers will usually finance between one and two thirds of the sale price that can be paid back with interest over several years.
If you are looking for a way to free up capital that is tied to customer invoices, then invoice factoring is a viable option. In this case, a business sells its accounts receivable at a discount to another company. This company then provides instant payment.