How To Focus Your Alternative Lending Search
Individuals who are unable to secure traditional financing for their businesses may need to seek other sources that are less traditional. These untraditional forms of financing can have advantages and disadvantages. When searching for alternative lending sources, business owners may want to look at some of the most common methods of alternative financing.
Financing Purchase Orders
If a business is required to pay upfront for goods but must wait several weeks or longer to receive payment from its customers, the business owner may find himself unable to complete orders. A purchase order finance provider could help the business fulfill these orders by allowing the business to utilize purchase orders as collateral for a cash advance or line of credit. The lender can receive a portion of the value of the purchase order as repayment. This total may significantly exceed the amount of the advance or line of credit. In this form of financing, the customer’s credit worthiness may be considered rather than that of the business.
Factoring is a form of alternative lending that can involve a business selling its outstanding customer invoices at a discount to an alternative lender who provides cash to the business. The lender may have to accept a higher risk by assuming responsibility for collecting on those invoices and taking the loss if the customers do not pay. Because of the risk involved, the interest and commission for this type of lending can be high.
Businesses that only need a small amount of money but don’t have credit scores high enough to obtain financing from a bank, may seek a microloan. Although these lenders may be more flexible with credit scores and may require less documentation from the business, the interest rates can be high.
Sale of Equipment and Leaseback
Depending on the nature of the business, expensive equipment may be needed for it to operate. If the business owns the equipment, some lenders may be willing to purchase the equipment from it and then lease it back. The money from the sale can be used by the business which, in turn may be responsible for paying monthly fees to lease the equipment from the lender.
Financing Credit Card Receipts
Businesses that accept credit cards may be able to obtain a cash advance based on their history of credit card receivables. The lender can receive a portion of the future credit card transactions from the business until the loan is paid. This form of alternative lending can be appealing to businesses that have credit problems.