There are a variety of different small business financing options available to business owners in need of capital. The range of options can be quite confusing to the small business owner who has never borrowed money to grow their business. That’s why it’s important to know what options are available to you before you decide to apply for small business financing. Besides the standard small business loans and lines of credit, there are also alternative ways to fund a small business. Here’s a list of the three types of alternative small business financing options that you may know nothing about:
Microloans – Microloans were created to help support entrepreneurship amongst underserved and poor communities. The SBA (Small Business Administration) provides funds to hundreds of small, local community lenders and organizations that issue microloans up to $50,000 to qualified borrowers. The average microloan is around $13,000 (for startups) and close to $50,000 for existing businesses. The interest rates are usually 8% to 13% with a max term of 6 years. The microloan program has proven to primarily benefit minority business owners with less than perfect credit, according to the recent report “Business Microloans for U.S. Subprime Borrowers.”
I always recommend this program to aspiring entrepreneurs who have bad credit, no credit, and no proven track record in owning a business. Rather they have a proven or profitable business idea. In my experience, individuals who fit that profile will have a better chance at qualifying for a microloan to start a business than any other type of traditional financing out there.
Accounts Receivables Financing – Accounts receivables financing is a type of alternative financing that works well for existing businesses owners that are experiencing a healthy, consistent cash flow. Personal credit is typically not a factor in getting approved for accounts receivables financing. A business typically needs to have at least $2,500 to $250,000+ in receivables to qualify for accounts receivables financing, depending on the lender.
I recently helped a small security company finance $100,000 per month in receivables. This was done by selling their future receivables to the financing company so they could be paid upfront on the receivables instead of in 30, 60, or 90 days later. The financing company provides up to 97% on each dollar financed. That means the financing company is issuing the security company $97,000 per month upfront. The financing company then bills the security company’s customers directly and collects the full $100,000 payment which nets them $3,000 per month. To me this is certainly a win-win situation because my clients get their money upfront and the financing company makes a pretty good return in a fairly short period of time.
Merchant Cash Advances – A merchant cash advance is a funding option that I usually only recommend to existing business owners that have less than perfect credit, does not qualify for traditional bank financing or accounts receivables financing, and has a healthy and consistent flow of cash coming into their business. It works best for companies that accept credit cards and have a good volume of daily credit card sales. High trafficked retail businesses and restaurants are a good fit for this. It’s an expensive funding option and requires daily pay back. You have to be 100% sure you can afford to get several hundreds dollars debited from your business checking account daily. If not, you may want to pass on this and try a microloan. Since merchant cash advances require daily pay back, they can hurt your business more than help if you don’t have significant cash flow.