In recent blogs, we’ve shared the differences between alternative business funding methods like factoring
and asset based lending
, which are still a less common source of funding for many small to medium size businesses in the US. When business owners and entrepreneurs look for business loans, most have by default only considered traditional bank and SBA business loans, but there are other options for alternative business funding. This post will unmask two common myths around alternative business funding, to help business owners understand the differences and how to find help in a new form of funding.
Myth: Business Loans From Banks Are the Only Way to Finance
According to the Federal Reserve Bank of New York: “..although many employer small businesses were profitable and optimistic, a significant majority faced financial challenges, experienced funding gaps and relied on personal finances.”
There are more options to finance a business than bank loans or SBA business loans. In fact, SBA business loans are not available to many businesses who apply for them. Many startups and for businesses with less than 3 years of operating history, find a lack of established credit or the sole proprietor's credit history may be needed to help the lending institution make a decision. So while these methods may be the most commonly known, they leave many small to medium-sized business owners still look for solutions to get access to the cash they need. With the rapidly growing number of online lenders and peer-to-peer lenders offering business lines of credit, these solutions seem like good next line options for business owners due to their less strict borrowing requirements. However, it is also important to note both online lenders and Peer-to-Peer lenders tend to charge higher interest rates and may not provide enough cash for business owners to fund their growth.
Alternative business funding solutions like factoring and asset based lending fill the gap between these two common finance products. With reasonable costs, a quick approval process and personalized service, alternative funding allows businesses to access the cash they need without being penalized for risky high-interest rates or large liability payments. Additionally, because the funding provided to your business can grow in line with your business, you never have to worry about where that next boost of income to support growth will come from.
Myth: Financing a Business Means More Debt
Invoice factoring is an advance on the cash you are owed in invoices. It frees the cash that is locked in the accounts receivable column of your business and the factoring provider collects on the invoice from your customer, there is never a ‘payment’ to be made. You are receiving the cash you are owed a bit early, for a small fee. The factoring services provider handles collections, credit checks and often can even help you with invoicing. Alternative business funding gives you a partnership for funding your business that includes the back-office support that small and mid-sized businesses often lack. Startups, who typically cannot access a bank loan until they are 3 years old, often leverage alternative business funding because it provides both quick access to cash and critical process support for basic invoicing and collections needs. Partnering with an alternative business funding partner before you need cash ensures that when unexpected events leave your business cash-tight, you have a solution in place.