4 Small Business Lending Alternatives
All businesses need access to additional working capital. The ideal means of obtaining capital is through a business’s core operations that generate revenue.
When a business earns a profit, some or all of that profit can be put back into the business to ensure growth. However, sometimes businesses will require additional financing from a reputable lender. Many business owners turn to banks to secure financing. However, banks aren’t the only financing solution available to business owners.
In this article, we’ll discuss seven bank lending alternatives, so that you’re aware of other viable funding options.
1. Business Lines of Credit
A line of credit (LOC) is a set amount of money that a business can use when it needs cash. It can be either secured or unsecured.
A secured line of credit requires some collateral, whereas an unsecured loan doesn’t. Once the amount borrowed from the LOC is paid off, It frees up the amount to be used in the future.
Pros
Flexible financing option that reduces cash flow shortages
Can help businesses predict their future operational cycles
Cons
The interest rates can be high in some cases
Businesses may rely on the LOC too much, causing them to overextend.
2. Merchant Cash Advances
With a merchant cash advance, a business owner receives lump sum financing in exchange for a percentage of their future credit card sales. If you receive consistent credit card payments, you’re likely a great candidate for this product.
Pros
Payments aren’t fixed, so the weekly or monthly payments are based on your business’s credit card sales at that time.
Fast financing option
Payments are taken directly from your account, reducing the chance of late fees.
Cons
The rates can be high
If you don’t receive consistent credit card sales, this option won’t work for you
3. Working Capital Loan
A loan that’s used to fund a company’s core operations is known as a working capital loan. Day-to-day operations can cause financial hardship if a company doesn’t have the funds to maintain them. This frequently occurs with seasonal businesses or companies that are subject to cyclical sales. Still, businesses in various industries can experience working capital shortfalls from time to time.
A working capital loan isn’t a specific loan type, but more of a category of loans. Any loan that helps a business meet short-term operational obligations could be considered a working capital loan including lines of credit, term loans, and invoice financing.
Pros
Business owners can retain equity in their businesses
Usually, collateral isn’t required, but the terms are subject to your business lender’s requirements.
Cons
If you don’t pay off your balance during the set term, it could affect your business’s credit rating. That’s why it’s important to evaluate your cash flow during the life of the loan.
If collateral is required, it could put your collateral assets at risk.
4. Equipment Loans
Many businesses require equipment to operate; therefore, if that equipment fails, it can derail the business. Unfortunately, many small businesses lack the capital required to maintain equipment.
Because the equipment serves as collateral, owners can often get financing for a large percentage of the equipment cost equipment since it’s a secured loan.
Pros
Equipment loans are secured, making them easier to obtain
Equipment loans often come with low rates. However, it’s important to read the terms and conditions prior to committing to an equipment loan.
Cons
Many lenders require a significant down payment for this type of loan.
When equipment becomes obsolete, it may be difficult to receive any tangible value from it.
Is Conventional or Alternative Financing Right for You?
Choosing the right financing option is challenging, but there are several options are available to small business owners, like the funding options mentioned in this post.
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