When you need money for your business, your immediate thoughts might be a regular business loan or using a credit card.
But these traditional borrowing methods aren’t always available to you, or they might not be fast enough for you. Perhaps you need to quickly raise some funds or fill a gap in your cash flow.
Dave Beard founder of financial comparison website Lending Expert explains there are other alternative business financing methods that you haven’t previously considered. Try considering one of the options below to see if they might work for your business.
Invoice financing or invoice factoring is the process of using your unpaid invoices to secure finance. You sell your invoices to an invoice finance company for most of the value of the invoice. Once the balance of the invoice has been settled, you get the rest of it, minus a fee that the finance company takes. Some companies make a distinction between invoice discounting and factoring. With discounting, you liaise with your customer to get payment, whereas, with factoring, the finance company collects the payment on your behalf.
There are several benefits to invoice financing. It can help to make it easier to manage your cash flow, giving you instant access to what your customers owe you. You want to give them time to pay, but that can leave you with no funds to cover your expenses, and some clients can drag their feet. On the other hand, you might need to be careful of customer perceptions if you hand over payment collection to a third party. If customers think that you’re in financial trouble, it could be bad for your reputation.
Asset financing gives you an option for your business if you’re looking to finance a specific asset. You might want to invest in a new vehicle or some new equipment, for example. Asset finance means taking out a loan to buy or lease the assets you need. Asset finance is often in the form of hire purchase contracts. You’ll have access to the asset right away, but you won’t own it outright until you’ve completed a series of payments, which could be spread over a few years. You can also simply rent the assets you need, instead of buying them. Another way asset financing can be used is to release value tied up in assets you currently own, referred to as refinancing.
If you’re specifically looking to buy new assets, asset finance can work out well for you. A hire purchase contract can be a great way to get what you need and spread the costs. Refinancing can be useful too, especially if you have plenty of assets, but you’re short on cash.
Crowdfunding is a relatively new way of raising capital for your business, made possible by the internet. It’s technically something that you could do offline too, but an online campaign makes it a lot easier. Using crowdfunding, you ask people to put money into your product or business. They might be family and friends, but they can also be complete strangers, current customers or fans of what you do. In return, you might offer them a range of things. Sometimes businesses give investors shares in their company. On other occasions, they might offer them various rewards related to how much they donate. This could include anything from a special thank you card to one of your products. Businesses often use crowdfunding, but it’s also used by artists of all kinds, charities, and individuals.
Crowdfunding is a good way to get the money you need, but only if you can get your campaign the required attention. If you don’t do enough to promote your crowdfunding campaign, it will go ignored, and you won’t raise the funds you need. With many crowdfunding platform models, this means you won’t get anything, as you often need to raise the full amount that you set.
As the name suggests, peer-to-peer or P2P lending is a form of lending where ordinary people can lend to others. This might involve one person agreeing to lend all the money that a business requires, but it is usually a number of different people all contributing a percentage of the total amount. Lenders benefit from earning interest on the money that they lend. This type of lending is carried out online, with many designed for individuals but several options for small and medium business too.
P2P lending can help your business to gain access to more competitive interest rates because there is no bank involved in the lending process. You could access the money you need faster too. It’s quick to apply for funding, and you can often get the money you need within a couple of weeks or even a few days. Sometimes there can be limits on who can apply for a peer-to-peer loan. Some lenders require you to have a certain turnover or follow other rules.
Merchant Cash Advances
A merchant cash advance is an unsecured funding option that you repay through your future sales. The lender gives you the cash you need, and they then take a percentage of your sales as repayment. These payments are usually taken through card payments, so your business needs to use card terminals or take card payments in other ways. Merchant cash advances can give you competitive rates, and you can get the funding you need quite quickly. Paying it back from your future sales can make it easier to repay too. If your sales are low, you’ll pay less back. Paying what you can afford makes everything more manageable.
The application for a merchant cash advance can be quick, and it’s convenient if your business takes card payments. However, some businesses can find that they end up repaying at high rates, even if they pay in line with their sales. It could also impact your cash flow, as payments are taken from your daily sales.
You might want to consider any one of these alternative financing options for your business. One of them might be suitable to help you manage your cash flow or raise essential capital.