/ Alternative Financing

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance business operations and improve cash flow.

Factoring your receivables allows you to be paid by your factoring company instead of waiting for your invoices to be paid by your customers which, in turn, can improve your business cash flow when you may otherwise be unable to meet your current working capital needs. Factoring is different from a bank loan in that, among other things, the emphasis is on the value of the receivable, not the credit worthiness of your business.

There are many factoring companies available in today’s market that can fund a percentage of your company’s creditworthy accounts receivable. Learn more about how to use factoring for cash flow and talk to your accountant to help you understand the advantages and disadvantages of factoring.

Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years. The primary advantage of leasing business equipment is that it allows you to acquire assets with minimal initial expenditures, thereby preserving capital in your business.

Because equipment leases rarely require a down payment, you can obtain the goods you need without significantly affecting your cash flow. When compared to business loans, leases can be easier to obtain and often have more flexible terms. Often, lease payments can be deducted as a business expense, reducing the net cost of your lease. It’s important to note, however, that lease financing is generally more expensive than bank financing.

Deciding whether you should lease or buy will depend on your situation. Each business is unique, and the decision to buy or lease business equipment must be made on a case-by-case basis. Be sure that you explore your leasing options and thoroughly understand the advantages and disadvantages of leasing, and talk to your accountant before making any decisions.

Vendor financing may be an option worth exploring as you seek ways to improve your business cash flow. If you’ve established a good relationship with your vendors, sometimes it’s possible to get them to agree to extend their terms for a particularly large order and/or for an extended length of time. Essentially this becomes a form of financing for your business.

If you’re a new company with little or no history, you may want to consider approaching vendors and showing them your business plan. If the vendor is convinced your business will not only be successful but will also become one of their better customers in the future, they may be willing to work with you to provide extended or preferred terms now.

Finally, if you have a proven track record with a vendor and owe them payment for a large order, they may be willing to consider exchanging their accounts receivable from you for a notes receivable. As with any request for funding of any kind, be sure that you are prepared to have these kinds of conversations with your vendors.

There are numerous local, state and federal loan programs available to help businesses find the capital they need to start and grow their operations.

Here’s some important things for you to know about these programs:

• • The requirements for receiving funds from a government loan program are similar to what traditional banks are looking for. After all, government loans are funded by taxpayer dollars, and the need to make sound loan decisions is just as true for the government as it is for a bank. As such, make sure that you’re prepared to talk to a lender regardless of what source you are requesting the funds from. One of the worst things that you can do is to approach a lender – whether the government or a bank – and not be prepared; this only serves to send a message to the lender that you’re not a good credit risk. Here’s the good news…There are resources right here in your community that can help you assess your readiness to talk to a lender.
  • Many government loan programs require that a bank be involved in the financing. It’s important for you to understand this for a couple of reasons. First, you need to make sure that you’re prepared to talk to a lender; failure to do so can diminish your chances of securing the funding you need (see #1 above for help with this). Second, the more you understand what government loan programs are available the better prepared you will be to talk to your banker. The reality is that not every loan officer will know about all available programs. For this reason, if you’ve done your homework you can potentially be in a position to educate your banker about programs that they can use to turn their response to your loan request from a “maybe” into a “yes”. Before you talk to a lender, take time to learn how specific government programs can benefit your bank.

• Do your research and make sure you understand all of the programs that are available. You can’t utilize a program that you don’t know about. To help with this, we’ve compiled information about government programs on the Financing page.

Credit cards can be an acceptable form of funding for your business, and especially for start-ups, but this is only going to be true if you thoroughly understand the advantages and disadvantages and have a definite repayment source for the credit card debt.

For example, credit cards may work for you for short-term expenses that you know you’ll be able to repay quickly, but watch out for high interest rates and beware of mixing personal and business expenses on the same card. Shop for a good interest rate, understand fees, and know how your use of credit cards affects your credit score. The more you understand the advantages and disadvantages before you incur the credit card debt, the better off you will be.

Crowdfunding and Peer-to-Peer Lending can be an option for business funding, and as credit tightens, a growing number of entrepreneurs are turning to these lending sites to get the cash they need. Be sure to do your research and understand all aspects of such lending including, among other things, the impact it can have on personal credit scores.

A few sites that you can explore are included here. These sites are being provided for convenience only. No representation or warranty is made about these sites; visitors should conduct their own due diligence before using any service. Kickstarter; Prosper.com; Kiva.org. Learn more about Crowdfunding.