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4 Alternative Sources of Financing

Date: January 15, 2010

Though the economy is easing toward recovery, many business owners are finding that credit is still tight. However, banks are not the only source of financing for businesses. Here are four other viable methods for obtaining capital until the banks loosen their lending regulations again.

1. Business cash advances: If a small business receives payments via credit cards, business cash advances allow them to get an advance based on projected future receipts. Typically, businesses must receive approximately $3,000 to $4,000 in payments from customers via credit cards each month to qualify for such a program. After money is fronted to the business, that money is then repaid through automatic deductions from the business's future credit card sales. Unlike personal cash advances, credit is not a major factor in being approved for a business cash advance. And since the money is automatically deducted from future purchases, monthly payments are lower when your sales are lower. 

2. Accounts receivable financing: What business owner doesn't know the pain of waiting for invoices to come in? To get around the lag between service and payment, business owners can consider accounts receivable financing, commonly referred to as factoring. With this strategy, small business owners sell their invoices to a third-party factoring firm at a discount, which could be anywhere from 1% to 6% of the invoice's total. The factoring firm typically has deep enough pockets to wait for the invoices to be paid, whereas the small business benefits from receiving instant access to capital. 
 
3. Vendor financing: Small businesses need certain products and supplies to run efficiently, so if a business does not have the cashflow to make those necessary purchases, it could find itself unable to keep up with product demand. An alternative to borrowing funds from a bank is seeing whether a vendor financing agreement can be set up. With vendor financing, a vender will lend small business owners money to buy their own products. The idea is similar to a line of credit in that the vendor fronts the money and the small business works out a payment arrangement. Such a move ensures that the small business owner has the supplies to keep the business going, while the vendor gets the sale by agreeing to push back payment.

4. Peer-to-peer lending: Social networking websites bring all kinds of people together, so it's no surprise that sites would connect those who are looking for money with those who have money to lend. Sites such as www.prosper.com, www.lendingclub.com and www.peer-lend.com let business owners announce what they need and what interest rate they're willing to pay and those who are willing to front the money get to respond. The good thing about peer-to-peer lending sites is that they often provide an easier avenue to cash than a traditional bank, but it's important to note that such sites offer personal loans, even if that loan will be used for business purposes. As a result, a business owner's personal credit score can be compromised.

When it comes to running a business, cash is king. Alternative options for securing capital are always good as long as business owners understand the risks and the rewards.

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