While the economy is slowly turning around, many small businesses are frustrated by their inability to get bank financing. I recently read an article in the CPA Daily newsletter discussing alternatives to traditional bank financing.
Factors purchase outstanding invoices, allowing a business immediate access to cash instead of making it wait 30, 60 or 90 days for a customer to pay. Factors buy receivables generally without recourse, meaning they assume the credit risk of the business’ customer.
Equipment Sale and Leaseback:
If a business owns expensive equipment or machinery outright, anything from a fork lift to a printing press, it can find a lender who will buy the equipment for a lump sum and lease it back. During the term of a lease, the lessor (the lender) owns the equipment. When it ends, the lessee (the small business) can buy the equipment from the lessor or give it back and get a newer model.
As the name suggests, microloans tend to be smaller in amount, but can run as much as $150,000. "In many cases, that's enough to help them with working capital for a month or so and that's often all they need,” says Gary Lindner, chief operating officer of ACCION Texas, one of about 300 U.S. non-profit micro-enterprise lending institutions.
Merchant Cash Advance:
A handful of independent finance companies will give merchants a lump sum upfront in exchange for a share of their future credit-card sales. Different than a loan or lease arrangement, a merchant cash advance is based on a business’ monthly credit-card sales history. The upside: unlike a loan, there are no due dates and no fixed payments and it's faster to get approved. The downside: while there's no traditional interest rate, providers such as AdvanceMe, Merchant Warehouse, or AmeriMerchant will take a cut – called a split -- that is generally 15 to 17 percent of credit-card receivables.
Purchase Order Financing:
A financing agent advances money against a signed purchase order for finished goods or value-added products to help fund manufacturing and fulfillment of the order. This type of arrangement is helpful for companies such as import-export firms, which must pay for raw materials immediately but wait to get paid for their finished goods. Once goods are shipped and customers are invoiced, the transaction is closed out.
The upside of purchase order financing: it depends more on the credit standing of a business’ customer rather than its own. The downside: providers of these advances take a cut of a company’s profits, usually in the range of 4 percent or less.
If you chose to go an alternative route, make sure you do your homework and pick a reputable provider of funds. Do any of you have other suggestions for small business financing?