When a business growth opportunity or temporary cash crunch arises, business owners may turn to traditional funding to fulfill their capital needs. But without access to or approval for bank funding, alternative funding solutions that fit a range of business needs and situations based on where you are today may be the answer you’re looking for. Let’s discuss standard alternative lending options and how you may choose the right one for you.
#1 Factoring and Accounts Receivable Financing
Also known as invoice factoring, this type of lending involves selling an account receivable or invoice at a discount to get immediate cash while waiting for invoice payments from customers. Factoring provides flexibility to monetize existing accounts receivable and only factor the invoices you choose, allowing you to gain capital without giving up any equity or incurring additional debt. It can help in various situations, such as:
- You’re experiencing growth and need capital to keep up.
- You’re a new business owner with little or no lending history and cannot secure traditional funding.
- A significant amount of your revenue is tied to one or a few clients, and you want to offset the risk of losing that income due to overconcentration.
- You’re experiencing cash flow issues due to extended payment terms and need capital to maintain operations, such as paying rent, employees, and suppliers.
What to Consider with Factoring
If you’re interested in factoring, you should consider the following:
- There may be criteria to meet before factoring your invoices, such as no blanket UCC filing or mechanic or construction liens.
- A factoring company will first review your customers’ credit and payment history before providing approval.
#2 Asset-Based Lines of Credit
Like invoice factoring, asset-based lines of credit will help you leverage your existing assets to gain capital, such as your accounts receivable, inventory, and equipment. This creative financing option offers a combination of solutions to meet your capital needs. It may be suitable in the following situations:
- You have non-conventional operations, such as seasonal business, and need capital to buy inventory leading up to your peak selling period and repayment terms around your seasonal sales.
- You’re experiencing cash flow issues and need to stay in good standing and avoid a lapse in inventory, supplies, or other items.
- You need an injection of capital to buy more inventory to meet growing demand while maintaining your everyday operations.
What to Consider with Asset-Based Financing
If you’re interested in pursuing an asset-based line of credit, you should consider the following:
- Specific eligibility criteria include generating and having a clear title to accounts receivable.
- Lenders should work with you based on your unique circumstances to provide a combination of solutions.
#3 Bridge and Term Loans
As we’ve mentioned, factoring and asset-based lines of credit require specific criteria that every business may not meet. When you don’t fit the traditional profile required for those options, bridge and term loans may provide similar solutions, particularly when meeting a unique capital need or significant growth effort. A bridge or term loan may help in the following situations:
- Your business can increase exponentially with an additional piece of equipment but you need more capital to purchase it.
- You need to refinance a high-cost loan with another lender to free up resources for additional breathing room and investment opportunities as they arise.
- You’re awaiting a significant client or grant payment and need capital to meet short-term needs before it arrives.
What to Consider with Bridge and Loan Terms
If you’re interested in a bridge or term loan, you should consider the following:
- A lender should review your complete business history and the financial position of your company to determine which solution or combination of solutions meets your needs.
- Work with a professional to structure your repayment terms to correspond with your projected revenue growth so you can maintain normal operations while remaining agile enough to scale.
When you don’t have access to traditional funding, alternative financing solutions can help give you the support and confidence to continue growing your business. In addition, there are many other situations we’ve not discussed in which alternative funding may be suitable for your business. Contact our team to review your individual circumstances and learn how we can provide customized solutions so you can focus on expanding.