Benefits of Alternative Financing
The words “alternative financing” often come with negative feelings in the business world, especially after many alternative business loans were accused of predatory practices during the 2008 financial crises. In fact, according to Forbes, some in the alternative loan business charged businesses between 70 and 90 percent annual rates on such financing. However, with increased safeguards, the growth of invoice factoring options and lower interest rates in the alternative lending market, there are many benefits in alternative financing for businesses today.
Merchant Cash Advances
After the financial crisis in 2008, banks severely tightened lending requirements, and these restrictions led to fewer businesses qualifying for additional capital from traditional lending institutions. These lending restrictions remain despite evidence that there is a slow but steady improvement in the economy. This has led to many small businesses unable to fund startup or expansion projects, including restaurant equipment financing, leasing of equipment, or even to sustain operational growth. According to many merchant cash advance companies, small companies and startups are finding that banks will still not work with them when it comes to cash needs. This has led to many alternative business loans designed to help merchants on a short-term basis that help merchants purchase inventory, manage cash flow and to fund growth. In addition, agencies such as the National American Merchant Advance Association (NAMAA) provide education and standard practices to help keep the industry legitimate and trustworthy. For many businesses, the short-term capital and structure of trustworthy cash advance deals work perfectly to help them through slower periods or to finance other needs.
Factoring Loans
Although merchant cash advances remain the most well-known alternative business financing options, other forms of alternative financing are also gaining in popularity. Invoice factoring companies assume the duties of invoice and credit analysis, eliminating the need for employees to handle invoicing and bill collection while combining a customer’s invoices into what amounts to a line of credit, allowing the client to withdraw up to 90 percent of those funds. The customer pays interest and fees on the amount withdrawn while the invoice is outstanding. Once the invoice is paid, the customer is credited with the ten percent balance less fees. For those in the service industry, such as transportation, this provides additional funding for expansion, commercial truck financing, inventory replenishment and many other needs without the strict requirements that banks need to approve business loans.
Take Precautions
Before entering into any type of alternative financing agreement, it is important to take a few precautions. Be sure that the lender understands your type of business. For example, commercial truck financing for a construction company may be different than for a delivery company. Know the management team at the lender and their knowledge of your industry, as well as where their capital is obtained. Read the entire funding agreement carefully and compare them with other alternatives. Understand clearly what the alternative financing will cost and how those costs will be offset by an increase in business. If possible, obtain a copy of the contract in advance and have it reviewed by an accountant or attorney.
Using alternative business financing is not as risky as it was in the past. Whether you need restaurant equipment financing, want to purchase new or updated inventory, or simply need startup capital to get a new business idea off the ground, alternative financing has fewer restrictions than traditional business financing, offers a variety of options to help you with funding, and has fewer risks than many people believe.