Small Business Financing Options

Need additional cash?

Small business have several more funding options today than in the past, says Stephen Sheinbaum, founder, CEO and president of New York City-based Merchant Cash & Capital. His company, a provider of merchant cash advances for businesses (more on that later), is one of several new non-bank financial firms that provide alternative paths to funding.

In short, if you are struggling to get financing or you’ve been passed up by a bank, your story isn’t necessarily over when the bank doors slam shut behind you.

Admittedly, interest rates can creep up when you’re dealing with non-traditional financial products, but that’s often the price business owners pay for relatively fast and easy access to working capital. When you are “dealing with higher rate products, the financial companies are willing to take more risks,” notes Sheinbaum.

Here are his tips for scoring funds for your business.

5 Tips to Financing Your Small Business

1. It begins with your banker

“Start with a traditional bank loan,” says Sheinbaum, and make sure that you have your ducks in a row before you walking through those doors.

A potential borrower “really needs to understand his business, do his homework and sell it,” says Sheinbaum. Make certain that your “balance sheet is in order” he adds. Collateral matters to banks, so “prepare a list of assets” that includes property and equipment, he suggests.

In short, you must be prepared and provide a comprehensive accounting of your company. If you can’t piece together a complete picture of your company’s financial situation, the bank can’t either.  If that’s the case, your chances of getting funded are slim indeed.

2. Purchase-order financing

No luck with the bank? Borrow against expected income.

Seek “a financial institution that lends money against purchase orders,” says Sheinbaum. As a short-term financing solution, purchase-order financing allows business owners to borrow money for business that they have generated (in the form of an order) but have yet to follow through, much less collect, on.

If you landed a big account but are in no financial shape to deliver, purchase-order financing may be the way to go.

3. Factor financing

Somewhat similar to purchase-order financing, factor financing involves an institution—or factor in this case—that “lends money against accounts receivables.”

For example, if “I sell to Macy’s and Macy’s owes me $300,000,” explains Sheinbaum, you can borrow against that debt owed to you and typically receive the funds faster than a traditional loan. To successfully get funded, you have to show that your customers have a solid payment history. Essentially, you need good customers since it’s their financial standing that will primarily determine whether you get funded.

If you find yourself accounts-receivables rich but cash poor, you’ll find that factor financing is a fairly straightforward method to shore up your finances or to keep your company humming while you’re waiting for those big invoices to get paid. Expect to pay a little more in interest than traditional loans, however.

4. Peer-to-peer lending

Add borrowing to the innumerably long list of business activities that the Internet has revolutionized. As its name suggests, peer-to-peer lending pools capital from several investors and makes it available to borrowers that apply online, usually within a couple of days if they qualify.

Investors are lured by returns that typically beat the paltry interest rates on most savings accounts. Your credit rating plays an important role; it’s used to gauge the amount of interest that you pay and the returns that investors get (the higher the risk, the bigger the returns).

It’s a win-win for all involved—provided the borrower doesn’t default on his obligations. Examples of peer-to-peer lenders include Lending Club and Prosper.

5. Merchant Cash Advance

A growing alternative to traditional loans, merchant cash-advance firms leverage technology and today’s plastic-packing consumer to free up funds for small businesses. These companies, Sheinbaum’s Merchant Cash & Capital among them, fund businesses based on their expected sales—usually in three to four days in his company’s case.

After a small business applies and receives approval, a merchant cash-advance firm pays a lump sum to the business. Payments are then collected based on a percentage of the amount generated by their customers’ credit card and debit card purchases during the merchant cash advance’s term.

Again, expect to provide proof that you’re prepared to meet your financial obligations. Be ready with bank statements and merchant processing statements to back your case.

And if it all sounds too exotic or new, Sheinbaum points out that merchant cash advances are quickly slipping into the mainstream. “Amex [American Express] is now in the space,” he notes.

Pedro Hernandez is a contributing editor at Small Business Computing and Follow him on Twitter @ecoINSITE.

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