The BizFilings blog covering business tips and trends.
3 Alternative Business Financing Methods
Published on May 18, 2012
Read '3 Alternative Business Financing Methods' at 'Time to Start Up,' the small business blog by BizFilings.
Many small businesses face scenarios when money is needed right away but primary means of financing - friends and family, financial institutions and angel and venture capital investors - aren't viable. Fortunately, there are alternative ways to infuse a business' coffers, such as crowdfunding, merchant cash advances and factoring.
Earlier this week we covered the topic of crowdfunding. Check out our Curious About Crowdfunding article to learn about how this method can provide tremendous growth opportunity for small businesses.
Tips for crowdfunding success:
Make your page as appealing and informative as possible by including a short video and links to social media sites.
Get the word out by sending out a press release or writing a blog post on your website.
Offer incentives for different levels of contribution. While you can't legally offer equity in your company or a financial return to those who contribute via a crowdfunding site, you can list crowdfunding contributors' names on your business website and offer presales or other product promotions.
Merchant cash advances
Merchant cash advances (MCAs) are quick sources of funding for startups and service-oriented businesses that do not have much equipment, real estate or other assets to put up against a traditional bank loan.
The downside: MCAs come with fees and high interest rates. Citing a report from consulting firm First Annapolis, CNNMoney reported that typical annualized interest rates on MCAs run to 104-177 percent.
Despite the high interest rates, many businesses turn to MCAs to obtain necessary money quickly, and as they have grown in popularity, more finance industry heavy-hitters are starting to offer them. American Express, for example, has launched an "express merchant financing" program available to its business cardholders.
For certain types of businesses, invoice factoring is another solution that can provide a quick cash infusion.
Factoring is the process of selling an outstanding invoice to a financer, or "factor," at a discount. When the invoice is paid in full, the factor profits on the difference between the amount it paid for the invoice and the total invoice amount.
Factoring offers two primary benefits:
Deals can be arranged quickly. This makes factoring a good option for businesses that need liquid assets in the short-term and can't afford the potentially long, involved process of obtaining a bank loan.
Factors will often take on the responsibility of collecting payment on the invoice that is sold to them. This can save your business the time and resources it would take to ensure that payments are made.
Typically, factoring is offered on business-to-business invoices that are of a high enough value to make a deal worthwhile.
From the internet-based crowdfunding to the ancient practice of invoice factoring, there are a variety of alternative financing options available to small businesses. The good news is that the money is out there, the challenge is determining which type of alternative funding best fits your type of business and the circumstances you face.