Every business is different. Financing for one company may not have the same solutions for the next company. Every situation is unique. Maybe you need to acquire major assets, maybe your business is expanding, or maybe you just need working capital. According to Entrepreneur, about half to two thirds of business owners will look into some form of alternative financing options. These alternative financing options have changed the way businesses borrow. Here are some examples of Alternative Financing:
- Online and Peer- to- peer: Online service auction model in which you state the amount you need financed and the interest rate you are willing to pay, and lenders bid on who will provide your financing. The online service does charge a fee for checking your personal credit. Many of these peer-to-peer financing options are backed by individual investors.
- Crowdfunding: Raising money through a large number of people. Individuals or groups can contribute money toward your cause and either become investors of the company or receive a reward in exchange for their monetary contribution.
- Merchant Cash Advances: Merchant cash advances are a type of financing that looks at the past average of a company’s credit card sales and makes an advance which is based on the forecasted future sales. The advance is paid back by taking a percentage of each credit card transaction, until the advance is paid back.
- Accounts Receivable Factoring: AR factoring is an option where you sell your accounts receivable invoices and those assets are used as collateral for the financing. There is no debt to pay back, and the factoring company also works as an extension of your company to collect the receivables from your clients.
Examining Fees and Interest Rates
It is important to remember that every option will have interest rates and fees. It is important to understand not only your interest rate but your amortization amount as well. Many times, there are also hidden fees. Sometimes there are origination fees of 3-4 percent which are also added on to the loan amount. That 3-4 percent will also affect the interest that you are paying. Merchant cash advances charge premiums up to 30% or more. With Accounts receivable factoring, you are paying a fee between 1.5-5% of the invoice amount, but you are also getting additional service that monitor your receivables and customer credit as part of the fees. It is crucial to take the time with each option to calculate how much you are really paying in the end. Depending on your unique situation, your business may benefit more from having additional services included in the fees.
Credit- Worthiness of the Company
Many people don’t realize that there are many alternative financing options available. If the company has fallen on hard times in the past, it can ruin the credit reputation of even the most prudent and secure companies. This is one of the major reasons for alternative financing. Being in this situation can leave many people to turn to financing that involves high interest rates or hidden fees. This is not the only option. Doing research or getting free quotes can help you determine the best course of action for your company.
With the entrance of online and crowdfunding financing options, traditional banks may begin to fear that people will turn to more unregulated options. Online lending is still a fairly new concept and this brings debates regarding the level of regulation that should come into play. Fear of cutting off this innovative way for businesses to gain capital has kept regulations minimal, with the main concern being transparency and disclosure of the terms of the financing. Supporters of more regulation feel that online lending could become the next lending crisis if it is not more highly regulated. Merchant cash advances have been accused in the past of skirting around usury laws and charging high premiums for the use of the service.
Don’t get discouraged or feel backed into a corner if traditional financing options are leaving you at a dead end. There are companies who genuinely want to help your company succeed and thrive. Call us today to see if factoring alternatives may be right for your company.