• Alternative Financing


  • “Alternative financing” for businesses can have different meanings to different people. The information below is intended to help you begin brainstorming alternative business funding that you may not have otherwise considered.
     
    The more you know about possible alternative sources of financing, the better positioned you will be to find the resources you need to be successful. After reading the below information, do your research and talk to your accountant or other professional advisor to learn more.

    Factoring

    Factoring is a financial transaction whereby a business sells its accounts receivable (i.e. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance business operations and improve cash flow. Factoring your receivables allows you to be paid by your factoring company instead of waiting for your invoices to be paid by your customers which, in turn, can improve your business cash flow when you may otherwise be unable to meet your current working capital needs. Factoring is different from a bank loan in that, among other things, the emphasis is on the value of the receivable, not the credit worthiness of your business. There are many factoring companies available in today’s market that can fund a percentage of your company’s creditworthy accounts receivable. Learn more about how to use factoring for cash flow and talk to your accountant to help you understand the advantages and disadvantages of factoring.

     

    Leasing

    Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years. The primary advantage of leasing business equipment is that it allows you to acquire assets with minimal initial expenditures, thereby preserving capital in your business. Because equipment leases rarely require a down payment, you can obtain the goods you need without significantly affecting your cash flow. When compared to business loans, leases can be easier to obtain and often have more flexible terms. Often, lease payments can be deducted as a business expense, reducing the net cost of your lease. It’s important to note, however, that lease financing is generally more expensive than bank financing.Deciding whether you should lease or buy will depend on your situation. Each business is unique, and the decision to buy or lease business equipment must be made on a case-by-case basis. Be sure that you explore your leasing options and thoroughly understand the advantages and disadvantages of leasing, and talk to your accountant before making any decisions.


    Vendor Financing

    Vendor financing may be an option worth exploring as you seek ways to improve your business cash flow. If you’ve established a good relationship with your vendors, sometimes it’s possible to get them to agree to extend their terms for a particularly large order and/or for an extended length of time. Essentially this becomes a form of financing for your business. If you’re a new company with little or no history, you may want to consider approaching vendors and showing them your business plan. If the vendor is convinced your business will not only be successful but will also become one of their better customers in the future, they may be willing to work with you to provide extended or preferred terms now. Finally, if you have a proven track record with a vendor and owe them payment for a large order, they may be willing to consider exchanging their accounts receivable from you for a notes receivable. As with any request for funding of any kind, be sure that you are prepared to have these kinds of conversations with your vendors.


    Credit Cards

    Credit cards can be an acceptable form of funding for your business, and especially for start-ups, but this is only going to be true if you thoroughly understand the advantages and disadvantages and have a definite repayment source for the credit card debt. For example, credit cards may work for you for short-term expenses that you know you’ll be able to repay quickly, but watch out for high interest rates and beware of mixing personal and business expenses on the same card. Shop for a good interest rate, understand fees, and know how your use of credit cards affects yourcredit score. The more you understand the advantages and disadvantages before you incur the credit card debt, the better off you will be.