Alternative Funding Sources for Small Businesses

When looking to fund their businesses and boost the figures recorded by their financial management software, many smaller firms turn to banks. However, bank loans are not the only financing source on the block.

In fact, there are some situations in which small business owners may prefer to look outside of the larger banks in order to expand their operations. There is still plenty of money out there, both for starting a new company and for taking your existing business to the next level. Here are some suggestions for where to look:

Community banks

Recent reports have suggested that while some larger financial institutions may be temporarily cutting down on the number of business loans they grant, smaller local banks are continuing to lend money to credit-worthy start-ups. This is because community banks have largely protected themselves from risky loans in the past.

Be aware that if you have not run a business before, you will have to have stellar personal credit and be willing to offer up collateral - many first-time entrepreneurs use their homes for this purpose.

Credit unions

Credit unions have a similar situation to community banks. Many of these non-profit institutions are eager to lend money to new businesses and help others to grow. Small business owners who approach credit unions can expect to encounter business as usual.

Recent figures suggest that more businesses have already been exploring this option. According to the Credit Union National Association, business loans at credit unions rose by 36 percent during the first six months of the year, compared with the same period in 2007.

SBA loans

The Small Business Administration has been extremely useful for many small companies that - for whatever reason - have not been able to get a loan through traditional lending channels. Rather than providing funding itself, the SBA loan program works by guaranteeing a proportion of loans made by private lenders, up to a certain amount.

If you choose this option, know that you will be expected to be able to prove you have sufficient cash flow for repayment. You can use your financial management software to generate the necessary statements.

Angel investors

Angel investors are given their heavenly name because these private investors are dedicated to financing tens of thousands of the nation's small companies in exchange for an equity ownership stake.

Unlike venture capitalists, angel investors tend to be more patient with entrepreneurs and not expect immediate returns. They are also usually open to lending smaller dollar amounts for a longer period of time.

Businesses that accept equity financing benefit because they do not have to repay the money invested in their firm. However, be aware that an angel investor - or a group of investors - may take a substantial stake in the running of your company.

Asset-based financing

If you already have an established small business, asset-based financing can be a handy way to obtain working capital for growth.

Asset-based financing is secured by collateral such as accounts receivable, inventory, equipment or real estate. Many lenders prefer to use receivables for collateral because they liquidate quickly.

Among the benefits of this type of loan is that you do not have to give up any of your ownership equity to receive funding. Rapidly growing companies can also take immediate advantage of increased sales, even if their accounts receivable collection is lagging behind.

Factoring

With factoring, you sell your firm's accounts receivables to a company (known as a factor) at a discount, in order to free up cash. The company buying the receivables then assumes the responsibility for collecting them.

This method can be a good way of obtaining funding quickly without having to provide financial statements or a business plan. However, be aware that the fees charged by most factoring companies can end up being more costly than a loan.

Credit cards

Some 44 percent of business owners use credit cards to fund their firm, according to a survey by the National Small Business Association.

Owners who regularly rely on credit cards say they appreciate the convenience of easy access to credit on an as-needed basis. Making prompt and regular repayments is also a good way for a firm to build a solid credit history for future loans.

However, as anyone who has struggled to pay off a large balance on their personal card already knows, plastic can be risky. Make sure you secure a card with the lowest interest rate possible. Some providers may offer a fantastic initial interest rate - which quickly jumps by several percentage points once the introductory period ends.

Also make sure you use your financial management software to keep on top of payments. Credit card providers have been known to hike rates on businesses after only one late payment.
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