With the recent economic decline and new insurance laws and regulations, more and more small businesses are finding that traditional bank loans simply aren’t a viable funding choice. As a result, both entrepreneurs and current businesspersons are forced to search for alternative avenues of financing. The good news is that these avenues exist in a variety of formats such as equity financing, factoring, and asset-based lending.
Equity financing is one possibility that can take the place of a bank loan. This alternative business financing opportunity involves an angel investor or a venture capitalist. Angel investors are typically wealthy individuals who have owned their own businesses. They are most interested in investing in start-up companies and entrepreneurial endeavors and seldom desire a managing role in the business venture. On the other hand, venture capitalists are more interested in investing in existing businesses where the feel the company shows growth and profit potential. They will agree to invest money in exchange for part ownership of the business and a rate of return on their loan that is proportionate to the risk they are taking. Both of these means of equity financing benefit the business owner and the investor, as well as being viable options for new and existing businesses.
A second alternative financing choice is factoring, also known as accounts receivable financing. Factors are enterprises that buy outstanding invoices (receivables) from businesses in need of money. Instead of spending valuable time and resources waiting for invoices to be paid, a business owner can sell those invoices for cash. In this arrangement, the factor assumes the risk of late payments or of clients defaulting on the receivables. Accounts receivable financing is especially beneficial for businesses that already have a strong client base.
Asset based lending is yet another alternative financing prospect for businesses in need of cash. This type of financing requires businesses to put up collateral as security against the money they borrow. Inventory, property, equipment, accounts receivable, and other assets may serve as collateral for this kind of financing. In the event a business is unable to repay the loan, those assets become the property of the lender. However, once the advance is paid in full, the credit recipient retains ownership of all the assets used to procure the original loan. Again, this is a feasible choice for experienced businesses and start-ups.
While there are other alternative financing options available, most small businesses tend toward equity financing, factoring, and asset-based lending. Business owners should carefully research all of their options before deciding which type of financing is best suited for their unique business.
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