Choosing The Right Alternative Finance Options For Your Small Business

Sep 17, 2020

 

Making The Choice For Alternative Financing

In many cases, small businesses turn to alternative financing when they have either been denied a traditional business loan or are deemed an unsuitable candidate. According to the Biz2Credit Small Business Lending Index, small business loan approval rates at larger banks dropped to 8.9 percent in March this year, illustrating just how difficult it is becoming for some small businesses to access financing at the traditional institutions.  For others, they may not satisfy all of the strict criteria set out by these lenders, which ultimately narrows their lending pool. In difficult financial times as we’re seeing now, small businesses can also find their cashf lows and bottom line compromised, giving them poor chances of securing a business loan.

Lines Of Credit

 
One of the most common alternative finance options for small business owners is to secure a business line of credit. Unsecured lines of credit mean you are not required to offer any collateral as security for your financing. Alternatively, you can opt for a secured lined of credit. For those small businesses seeking better cash flow management or versatility in their financing, this can be a good option since it is not designated for a specific purpose, such as equipment purchases or business expansions. The flexibility of a business line credit often means your business can repay the loan early without any early repayment penalties.

 

 
You are also charged interest on the amount you end up drawing. So, although you may be approved for a $200,000 line of credit, you may not necessarily need it all, and therefore only pay interest charges on the amount you use – for instance, to purchase new equipment or additional business vehicles to expand your business fleet. Another bonus of opting for a business line of credit is that its interest rates can be as low as 7 percent for traditional lenders and between 13.99-90 percent for online lenders. More recently, Goldman Sachs and Amazon announced that they will begin offering small businesses line of credit , increasing the options for these ventures.

 

Merchant Cash Advances 

 
Merchant cash advances can be a great source of financing for small businesses that fall into the $87 billion small business financing ga p . Merchant cash advances (MCA) are not necessarily a new concept. Gaining popularity after the Green sheet forum in 2003, MCAs offer small business owners an upfront cash payment in exchange for a percentage of the business’ sales in the future. While they allow you to retain control of your business, MCAs can also come with higher annual interest rates – sometimes rising to triple digits. According to estimates from nav.com , the average interest rates can range between 70 and 200 percent. Therefore, it is always recommended that small business owners consider the pros and cons of an MCA before committing.  At “The Cardinal” we are very careful and transparent with our clients concerning this type of financing. 

 

Business owners can either get an upfront lump payment in exchange for a percentage of their future credit/debit sales or have their repayments structured into a weekly debit from their business bank account, also known as Automated Clearing House withdrawals. This would reduce your daily/weekly cash flow, and is something every small business owner should consider.

Invoice Factoring & Purchase Order Financing

In a recent Small Business Credit Survey by the Federal Bank of New York, almost 67 percent of small businesses admitted they encountered financial hurdles in the last year. For those business owners, the chances are that they will ideally turn their attention to recovering debts owed to them. In this case, an alternative could be the use of invoice factoring, which refers to the selling of your business’ outstanding debt due (receivables) to a company at a small discounted rate. For small businesses with longer credit collection times, this can be an attractive option for recovering money owed to them rather than chasing overdue invoices. While you do not recover the full cost of your receivables (1-3% cost), this type of financing has a place in many businesses.  Please check out our blog page for all the details on invoice financing and factoring.

There are also other increasingly popular alternative financing options for small business owners, such as term loans, equipment financing/leasing, commercial real estate cash outs, etc.  Please call Dan Casanta at 866-578-5999 x101 for more details.

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