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Article: Financing Alternatives for Small Businesses

Small company owners face constant challenges when running their businesses. One of the most important challenges is getting the right type of business financing. Most entrepreneurs start companies using their own money. If the business grows too quickly, however, reserve funds can be depleted and the owner is often left scrambling for money.

It’s not unusual for entrepreneurs to ask friends and family to invest in the business. While this strategy is common, it’s also risky and fraught with problems. And if it fails, you risk losing the relationship, and, perhaps, your business. Think about it this way: friends or family members only have two ways of putting money into your business. They can loan it to you or they can invest in your company and buy shares – making them a creditor or a co-owner. And if things go wrong, as they often do in small businesses, you can expect that they will want a say in how things should go. After all, it’s their money invested in your company. You can see how this strategy can create problems quickly.

Another alternative is to ask a bank for a line of credit or business loan. Here is the catch: you will get a loan only if your small business has ample collateral and a successful track record. More often than not, the bank also asks for your personal collateral to secure the loan. This request is problematic for business owners who have sunk all their assets into their growing companies and have no additional assets for the bank.

Two alternative financing methods are often overlooked by businesses that need money: factoring and purchase order financing. Both methods offer great flexibility and are much easier to get than conventional bank financing.

Problem: Your clients pay in up to 60 days. You need money sooner

This problem is common for companies that sell goods and services on terms. Your client can take up to two months to pay invoices. If you need funds quickly in order to meet company expenses, consider invoice financing. With this type of funding, a factoring company can give your company an advance on its invoices, which is secured by your soon-to-be-paid receivables. Although terms vary, most invoice finance companies advance about 80% of your outstanding receivables. The remaining 20%, less the factoring fee, is advanced once the invoice is actually paid by your customer.

This solution improves your cash flow, especially if used regularly, and enables you to sell to more clients using terms because you can always finance your receivables if you need money.

Problem: You need vendor financing to pay the costs of a purchase order

One problem for many resellers is winning a purchase order that exceeds their financial capabilities. They have the large order from a creditworthy client, but they lack the resources to fulfill it. Purchase order (PO) financing can be used in these situations to bridge the financing gap, enabling the company to complete the order and book the revenue. With this solution, a specialized funding company covers your supplier expenses. The transaction is settled once your commercial customer receives and pays for the goods. One important restriction of this program is that it’s available only to companies that resell goods or use third-party manufacturing. Unfortunately, most PO finance companies cannot service direct manufacturers.

Conclusions

Factoring and PO financing have gained popularity as a financing options for small and medium-sized companies in recent years. Both solutions are easier to obtain and set up than conventional bank financing – and they solve critical financial problems. These programs offer ideal solutions for companies looking for pre-delivery and post-delivery financing of their commercial sales.

Go back to the Business Financing Resource Center.

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