What are the Advantages of Alternative Business Funding?

No matter how long you have been in business, financing your business can be a long and grueling process. It is often more difficult to obtain business capital loans as you have to meet every single requirement and have a near perfect credit history. If this isn’t the case, the bank will probably turn down your proposal. You may consider traditional loans as your first option but they may not be the best choice for your small business.

As a result, alternative business funding will be the best way to go, where you can obtain alternative funding from sources other than traditional banks. But before you take a plunge and decide between traditional loans and alternative business funding, be sure to review the positives of both.

As a business, you might end up with an unexpected need for quick capital. And when it comes to funding, your enterprise size may limit your ability to gain access to capital for traditional forms of business lending. It is important that you seek the right type of financing for your business needs. If you are in need of capital quickly, alternative business funding will be the best financing option. Alternative funding has a lot of advantages:

●      Typically, when the businesses go for traditional bank loans for urgent funding- they have to involve themselves in a lengthy application process which can take weeks or months. The borrowers have to deal with a lot of paperwork from application to approval and wait until the bank decides whether they are approving your loan and the funding actually gets into your account. This is the main reason why many businesses rely on alternative business loans, which is approved in a day or two and you will probably hear back from the lender and get the money needed immediately whatever the reason be- whether that is because of tight cash flow or urgent need of raw materials to complete a project. This solution provides quick cash for your business needs.

●      The ease of applying for alternative funding is a huge plus. The requirements for alternative funding is not as stringent as when you go for a traditional business loan. For instance, if your credit score is on the lower side you may not qualify for a traditional business loan as a good credit score is required, the amount of time you’ve been in business is also a factor on which the approval is based on.

When you need a loan fast, who has the time to spend days putting together a long list of documents, including bank statements, tax returns, three years of financial statements, personal tax returns, list of collaterals and profit and loss statements. This financing solution helps you to get the answers you require quickly, without even sinking a lot of time preparing for a loan application that may not work in your favor. It requires a few documentation and stipulation requirements.

The important documents are likely to be- a single year of tax returns and bank statements. But the paperwork is much less, with some lenders all you need to submit is a credit application and the operating bank’s account statement.

• In order to put up with traditional bank loans, you often need to put up collateral. If you start with your venture, you don’t want the pressure of putting your home or your other valuable assets when applying to raise the amount for a certain amount of capital. Alternative financing sources don’t usually ask for collateral.

How does Purchase Order Funding Work?

     

     Cash flow challenges are a common issue in the business world. In fact, businesses have to borrow money either to expand or to solve their immediate cash flow problems.For instance, when a customer orders from your business, they are counting on you to deliver goods on time. When small businesses have to complete the orders they have to struggle a lot to find the right funding. And the last thing you have as a small business is to have to turn away a large purchase order because you don’t have enough cash in hand. Purchase Order Funding is one way to close temporary gaps that allow small businesses caught in a cash crunch to satisfy customers, keep operations running smoothly, and ultimately alleviating cash flow and raising profits. Purchase order funding is essentially a loan based on your orders. There are many options and methods available to borrow money for small to large scale businesses. Depending upon your business and its specific borrowing needs, purchase order financing is an effective way to raise the working capital that you will require immediately. It is considered a good fit for certain businesses with more orders coming before and fulfilling them before they have invoices and received payment for those orders. This can potentially cover the upfront costs with your suppliers so that you aren’t forced to turn down the orders, sales and other opportunities due to the cash flow restrictions.This can also be said as an advance which the businesses get before the invoices are paid by the customers. It can help them avoid burning bridges and losing customers in the future because they couldn’t afford to fill their orders at the moment. 

How purchase order financing works?

While it can get you supplies to complete your order but it is totally different from traditional loans. Instead of paying you they fund your supplier directly. There are four major components in the cycle of purchase order loan arrangement:

●      The financing company paying the money to fill a purchase order
●      The borrower
●      The supplier, who will deliver the products to your potential buyers.
●      Your buyers
 To explain it in a nutshell, the purchase order finance company provides funding to your suppliers to complete the order. Once the order is completed and delivered the finance service provider will collect the payment from the customer and pass the amount on to the borrower, that is you, after deducting fees.

For instance, you receive an order and don’t have enough funds to fulfill the order. Your options are also limited, so you can either delay the order or refuse the customer which can result in jeopardizing your relationship with your customer. In this case, if you can’t cover all or part of the costs, you can simply apply for purchase order funding. Just keep in mind that your credit history must be credible enough so that the lender may be willing to fund 100% of your order. Usually the lenders offer 90% or less, if you don’t qualify for full funding you can easily put up with additional fundings. The financing provider reviews the purchase order carefully including the supplier’s estimate, and other factors to determine whether you are eligible for the application. If approved, the lending company pays directly to the supplier. You receive the order from your supplier and ship them to your customers. Note that, if you have a reselling business the supplier might end up shipping the order directly to your customer. You can then send the invoice for the order you have fulfilled. Your customer pays the invoice amount directly to the financing company. They take out the relevant charges from what your customer has paid and the borrower receives the remaining balance.

Accounts Receivable Funding for Your Small Business

Accounts receivable funding is a solution that allows business owners to quickly turn invoices into working capital. Instead of waiting and waiting for months or even years for customers to pay their invoices accounts receivable factoring lets business owners get an advance on those invoices and use that cash for pressing business needs instead of waiting for weeks or months for customers to pay their invoices.

How accounts receivable factoring works?

Usually a business sells goods and services to its customers either in cash or on credit. In case of credit, the business sends an invoice to the customers which are typically paid back to the business as per terms of credit which varies from business to business and the time period can range from a week to 3 months or even more. 

Instead of waiting for the customer to make a payment on due dates, a business can sell its account receivables at a discount from their invoice value to the specialized company and receive cash immediately.

The key things that factoring companies look at when considering an application include:

●      Is this a business to business (B2B) or business to government(B2G) 
        invoice for a product or service that has been delivered or completed?

●      Is the account debtor or customer able to pay the invoice?

●      Does the business actually have accounts receivable?

Factoring companies' main concerns are not how many years a company has been in business or what is the business owners’ credit score. The main concern is that the invoice factoring company is buying will get paid or not. For this reason, invoice factoring is proven a very valuable tool for growing business that needs a finance partner to improve cash flow.

How can it help your small business?

With the available cash provided by accounts receivable factoring, businesses can take advantage of new opportunities for growth. Adding equipment or staff, opening new markets, or introducing new products are all much easier with cash in hand. 

Accounts receivable factoring is a useful source of financing for businesses that may not qualify for a business loan or business line of credit. You might wonder how much would it be to factor your receivables for your business. Even though factoring does not acquire any debt, like any form of financing, there are invoice factoring fees.

Why do companies use accounts receivable factoring?

Accounts receivable financing is an ideal choice of financing for many companies. Those in a startup or growth phase are often ineligible for traditional bank financing. However, these companies easily qualify for factoring. There are also, situations where factoring receivables is better than bank financing. As you can get services including:

●      Quick quotes

●      Fast funding

●      Growth opportunities

●      Customer services

How accounts receivable are priced by the factoring company?

The companies charge what is known as “factoring fee”. The factoring fee is a percentage of the number of receivables being factored. The rate charged by the companies depend on:

●      The industry that your business is in

●      The volume of receivables to be factored

●      The quality and creditworthiness of the company’s customers

●      Days outstanding in receivables

Additionally, the rate depends on whether it is recourse factoring or non-recourse factoring. Factoring companies usually charge a lower rate for recourse factoring than for non-recourse factoring. When the factor is bearing all the risk of bad debts, a higher rate is charged to compensate for the risk. With recourse factoring, the company selling its receivables still has some liability to the factoring company if some of the receivables prove uncollectible.

In essence, the easier the company finds collecting the receivables is likely to be, the lower the factoring fee.

The Benefits of Short Term Business Loans

When most people think of small business loans they think of the traditional five year or ten year term loans available from the bank or the credit union. And as a small business owner, there are several reasons to consider applying for a business loan. Maybe you are trying to get your business off the ground or take it to the next level. Or it could be that you are trying to solve some short term cash flow problems. Companies typically utilize short term business loans rather than long term, as they might need asset-based financing when they’re first getting off the ground, and in general, this type of financing is used more for working capital.

Short termbusiness loan is usually aligned with a company’s operational needs. It provides shorter maturities than long term, which makes it better suited for fluctuations in working capital and other ongoing operational expenses. In simple words, short term loans are typically designed to provide small business owners with quick access to working capitals to address short term financial issues. As with a traditional business loan, you will typically get the loan funds in lump-sum payments, then pay it off within one or two years.

Types of Short-term Loans

Whether you are a brand new business or an established business, there are a few different short term business loans from which you can choose.

1. Term Loans

These loans are similar to traditional bank loans, but with a shorter repayment term. In general, you will have a hard time finding term loans with short term periods from traditional small business lenders. Instead, you will likely need to work with an online lender to get what you need.

2. Lines of Credit

Most business lines of credit offer long repayment terms. But some online lenders offer short term credit lines if you prefer that set up over term loans.

3. Vendor Credit

Also called supplier credit, it involves working with one or more of your vendors to create a credit arrangement, where you typically get some time, typically 30, 45 or 60 days, to pay for a product or service they provide instead of cash on delivery.

4. Invoice Financing

Invoice financing is a short term small business loan that’s considered a cash flow loan instead of term loan. You can apply for invoice financing if you have sent a client or customer an invoice and haven’t received the payment yet.

Benefits of Short Term Loans:

●      There are times when ramping up a new project requires upfront costs that might exceed a business’s ability to cover with cash flows. In that case getting in and out of the financing quickly at a lower total dollar cost could make more sense than making payments on a long-term loan for several years.

●      Have you always dreamed of starting your own business? Do you just need a few supplies to get started? Then, you may want to take out a short term loan to cover your startup cost.

●      Running a business is challenging, and in some cases, you may not have enough cash in hand to cover various expenses. A short term loan can be an effective way to take care of the gaps in cash flow. If you expect your revenues to increase soon, a short term loan makes sense. For instance, you have a seasonal business and the work required is only in winters so you can’t afford to buy any supplies or inventory. However, you know that if you take out a loan you will be able to repay it easily. In situations like this, you may want to turn to a short term loan. Doing so requires the business to ensure that you have sufficient cash flow during that slow period to make larger periodic payments often associated with short term loans.

And, many times, short term business loans may come with faster approval rates than more traditional long term financing at banks.

What is a Small Business Line of Credit and How it Works?

If you own a business you probably already know that sometimes you need to access the working capital to help you grow. Even the most successful small business can experience late invoice payments, urgent unplanned expenses and other short term situations where the cash flow is less than certain. In cases like these, access to some extra funds can mean the difference between closing down your dream project or surviving the tough times and coming at the top.

What is a business line of credit?

A business line of credit is a key component of managing small business financing health. Unlike a business loan, a business line of credit acts as a ready cash at times when needed. A business line of credit can be a small businesses lifeline in times of emergency or even seasonal cash flow tightening.

Obtaining a line of credit for your small business can help your entrepreneurial spirit to take the company to the next level. It can be a more affordable option than a business loan because you pay interest only on the money you utilize.

A critical difference between terms of credit and term loan is that lines of credit are revolving. That means you can use the funds upto your approved amount, then repay what you have used to make the funds available again.

How could a small business benefit from a business line of credit?

A business line of credit is very flexible in comparison to other types of loans. In most cases, you won’t have to specify the particular use for your loan. This flexibility allows small businesses to use a business line of credit as a safety net or insurance policy against the gaps in cash-flow or seasonal lulls in business. And when it comes to running a business, having ample cash flow is imperative. Due to this reason, many business owners apply for a business line of credit.

These credit lines are similar to a credit card where the line is open and available for you to use and you only pay interest on the line you draw.

Since a small business line of credit can be such an affordable and convenient source of capital, it has become a common tool for small business owners.

How does a business line of credit work?

Business lines of credit work in a distinct way. First, unlike a business term loan, you don’t need a lump sum of cash deposited in your business bank account and pay it back incrementally. Instead, you get a credit line that you borrow against and pay back your money through weekly or monthly payments, as you use it. The credit line is revolving or replenishes when you repay the full amount.

You work with a lender to gain approval for a certain amount of money- the top of your credit line- and then you can draw against the business line of credit as you need it.

The pros of a business line of credit:

As a business owner, you are going to have times when working capital is tight, which can be a real issue. Working capital allows you to operate your business, allowing you to afford payroll, maintain inventory and pay for other consistent costs like rent and utility bills. Mentioned below are some of the benefits a business line of credit can provide to your small business:

●      Evens out cash flow during slow seasons

●      Allows you to pay for what you use

●      Improves business adaptability

●      Builds business credit

When could applying for a business line of credit be a better option rather than traditional loan?

●      Does your business regularly need access to short term capital to meet day-to-day business expenses?

●      Is your business a seasonal business where a credit line can help you bridge your busy seasons?

●      Do you usually need extra capital to ramp up your business?