Financial Solutions: Alternative Business Funding vs. Bank Loans

By Bibby Financial Services

19 Sep 2018

Which one is the best option for your business?

Established business owners can attest that traditional bank loans aren’t suited for every type of business or every stage of business growth. Further, Small Business Administration (SBA) business loans are a financial solution only available to a small fraction of the businesses that apply. With the majority of businesses looking for funding in the next year to facilitate growth, we know that your understanding of funding options is an important step in choosing the best financial solution for your business needs.

Traditional Bank Loans VS Alternative Business Funding

Traditional bank loans are the most commonly known financial solution for business funding. Often bank loans offer the lowest cost for capital but have the most restrictive accessibility. Bank loans typically require extensive lead time for the application and disbursement process. Loans must be repaid over an agreed to term, creating a regular payment liability. SBA loans are restricted by a number of guidelines that could include a business’s age and industry and some types of loans require a down payment, reducing or eliminating access to this source of traditional funding for many companies. The advantage of a bank loan or SBA loan is the minimized cost to the businesses that can qualify for them and need a financial solution for cash flow difficulties, a large cash sum to expand or to take advantage of purchasing opportunities.

Alternative business funding is in many ways a much different experience for entrepreneurs and is a more flexible financial solution than traditional funding. It is available to a wider selection of business ages and sizes than most traditional bank funding and can be an ideal solution when looking for loans for startups or for those businesses that have an immediate need for cash. Alternative funding can come in many forms including invoice factoring, Purchase Order financing, inventory financing, asset based lending and more. Factoring leverages your unpaid invoices, providing businesses an advance on the money they expect to be paid in the future for a small fee. Purchase order financing allows manufacturing needs to be funded with an in-hand client order which is a valuable tool for growing startups or businesses expanding with limited capital. Asset based lending can use company assets such as machinery and equipment, real estate, accounts receivables and inventory as collateral for a funding line that can be used for expansion, upgrades, to finance seasonality or during unexpected volatility.

Which Financial Solution is best for my business?

Every business has different needs. It is important to have a funding partner before financing is required so that a decision is never rushed or gone into without full consideration. To review, traditional bank loans are ideal for companies that are further established and that can meet the requirements set forth for the funding arrangement. This may include personal or business credit checks, revenue minimums, historical business records, a minimum business age and even the personal income of business owners/investors. For startups, traditional bank loans are often not available at all. However, alternative financing solutions like factoring or purchase order financing are available options for business owners to consider. 

If your business frequently deals with late client payment of invoices, excess held inventory or raw materials, is expanding capacity or upgrading equipment, these challenges would make alternative funding an even more attractive funding solution for consideration. If you are looking for a financial solution that provides startups with funding based on the potential to perform and considers other variables beyond credit in the decision to lend then business factoring is a perfect fit. Funding solutions like factoring are an advance on money you’re already owed, meaning while there are some nominal administrative fees, there is no recurring payment liability as found with bank loan terms. This makes factoring ideal for funding business expansions and retrofit upgrades and for smoothing the cash flow disparities in industries with long payment terms as standard practice.

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