Beyond the traditional bank debt (term loan or line of credit), there's numerous alternative debt sources for small businesses. Usually small business owners think about credit lines & other loans that are guaranteed by their personal assets or by their signature when thinking about financing sources for their businesses. (Signature loans are more difficult to receive in this restricted credit surroundings but they do exist.) However, numerous other options exist.
First, there's asset-based lenders. It is true that banks will lend against your receivables, but only in the event you have a track record of net income and money flow (and receivables) that justifies the business credit line. For example, in the event you generate every month account receivables of $100,000, have been doing so for 18 months, show a every month profit of 8% or more, and have financial statements that show this, then your bank will lend you the money. However, in the event you recently garnered or more new contracts and jumped from $60,000 per month in account receivables to $100,000, then the bank will only lend against the $60,000.What if your company does not have a profitable history of 12 months or more because it is new or you have had difficulty in the recent past? This is the space where receivables financing providers reside.
For tiny businesses with tiny or no history and minimal profit, factoring companies may be the answer. These entities purchase a company's accounts receivables at a discount (usually 3-14%) and collect the payments directly from the company's customers. Yes, factoring companies are expensive but may be an excellent source of capital for those businesses beginning out, recovering from losses, or in any number of similar situations. The key is to only use factoring in the SHORT TERM. You must make a PLAN to move to cheaper sources of financing within the next 6-12 months, otherwise you could find yourself in a perpetual cycle of insufficient working capital due to high financing costs.
Another source of accounts receivable financing is accounts receivable credit line providers. These entities provide a line of credit against your accounts receivables. You collect from your customers and pay the credit line provider. The receivables financing firm ensures they collect by placing a UCC lien against your accounts receivables. The typical fee range is 1% - 4% per month. The benefit of this type of financing is that more emphasis is placed on the credit worthiness of your client than on the creditworthiness of your company. Therefore, in the event you have a mid-sized or large company with a high credit standing as a customer, your every month rate of interest will be lower.
For tiny businesses with tiny or no history and minimal profit, factoring companies may be the answer. These entities purchase a company's accounts receivables at a discount (usually 3-14%) and collect the payments directly from the company's customers. Yes, factoring companies are expensive but may be an excellent source of capital for those businesses beginning out, recovering from losses, or in any number of similar situations. The key is to only use factoring in the SHORT TERM. You must make a PLAN to move to cheaper sources of financing within the next 6-12 months, otherwise you could find yourself in a perpetual cycle of insufficient working capital due to high financing costs.
Another source of accounts receivable financing is accounts receivable credit line providers. These entities provide a line of credit against your accounts receivables. You collect from your customers and pay the credit line provider. The receivables financing firm ensures they collect by placing a UCC lien against your accounts receivables. The typical fee range is 1% - 4% per month. The benefit of this type of financing is that more emphasis is placed on the credit worthiness of your client than on the creditworthiness of your company. Therefore, in the event you have a mid-sized or large company with a high credit standing as a customer, your every month rate of interest will be lower.
Another debt source for tiny businesses is equipment loans or lease providers. These are usually industry-specific equipment manufacturers or distributors. Why industry-specific? Because the equipment providers know the industry, market, pressures, and issues that help them choose whether or not a feasible customer is credit worthy or not. Third party equipment loan and lease providers often span several different industries. They broaden their understanding of the dynamics in various industries by employing individuals who may focus on or industries. The others understand how to credit evaluate tiny and medium businesses and what the red flag items are. If your company's credit profile is dodgy, think about pursuing a 3rd party equipment financing provider that makes a speciality of or industries. These will have the highest risk tolerance because they are highly skilful at identifying and mitigating risks in that market sector.
Another source of alternative financing is purchase order financing. The 'financing" is a tiny bit of a misnomer. Seldom does a financing provider actually lend against the acquisition order. In conversations with representatives of over0 companies that purport to offer purchase order financing, when delves down, what these providers actually offer is a letter of credit or guarantee of payment. For example, you need to manufacture one,000 items to fulfill the terms of a contract with a sizable, credit worthy entity such as a government agency or Fortune 1000 company. The acquisition order financing company would guarantee payment on delivery or within 30 days to the manufacturer, using your purchase order as the "collateral". Thus the financing entity has fundamentally inserted itself as a high credit-worthy company in order to get terms. Otherwise, you would need to pre-pay the manufacturer for the order. Consequently, although not officially 'financing', purchase order financing serves a business financing need.
Another source of alternative financing is purchase order financing. The 'financing" is a tiny bit of a misnomer. Seldom does a financing provider actually lend against the acquisition order. In conversations with representatives of over0 companies that purport to offer purchase order financing, when delves down, what these providers actually offer is a letter of credit or guarantee of payment. For example, you need to manufacture one,000 items to fulfill the terms of a contract with a sizable, credit worthy entity such as a government agency or Fortune 1000 company. The acquisition order financing company would guarantee payment on delivery or within 30 days to the manufacturer, using your purchase order as the "collateral". Thus the financing entity has fundamentally inserted itself as a high credit-worthy company in order to get terms. Otherwise, you would need to pre-pay the manufacturer for the order. Consequently, although not officially 'financing', purchase order financing serves a business financing need.
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