Alternative Options To Business Bank Loans
Whether you're starting up a brand new business or planning to expand your existing company, it's important to have sufficient capital to carry out your plans. When most business owners need some additional money, they turn to banks, but bank loan applications aren't always successful and there are times when you may need to seek out alternative funding options.
Fortunately, if a bank says no or you'd simply like to pursue another avenue for financial aid, there are plenty of other options out there. Here are just some of the choices available to you, complete with brief explanations and advantages of each one.
Accounts Receivable Financing
Account receivable financing, also commonly referred to as A/R financing, is a type of financing agreement in which a business receives the capital it needs, directly in relation to the business' account receivables. It works a lot like a regular loan, except you'll be using your account receivables as a kind of collateral, as opposed to property or other assets.
A/R financing can have quite strict requirements, as the receivables need to be sufficient to meet the demands of the financier. They also require a sizable advance to be delivered to the lender after approval, along with payment of a small holding fee. All in all, this type of financing is a good choice for those who need loans without wanting to give up any physical collateral.
Contract financing is another alternative funding option you may like to consider. With this type of financing, your business can receive funds for work you have yet to actually carry out, essentially giving you an advance on payments you expect to receive in the future.
With this type of financing, you'll get a percentage of future invoice payments in advance from the lender, and customers will pay their invoices directly to them. They'll take a fee for their services and return the balance to you. When it comes to accounts receivable financing vs contract financing, there are pros and cons to each side, depending on the situation. Contract financing is a good option when you've secured a contract but need funds now to carry out the necessary work.
Lines of Credit
Lines of credit (LOC) is another alternative form of business financing you can obtain both from banks and alternative lenders. They can be quite easy to obtain from alternative lenders online, especially for smaller and newer businesses.
Essentially, a line of credit functions similarly to a credit card, giving your company a credit pool to dip into as needed in order to pay salaries, buy equipment, cover unexpected costs, and so on. You'll pay interest on all that you borrow, however, so the LOC needs to be treated with care.
If you can't get approved for a business loan by a bank, there's no need to despair and assume that all loans are blocked off from you for good. There are plenty of online lenders out there who also provide loans to businesses in need, often with less strict requirements.
Online loans can be easier to obtain for businesses with weaker credit scores or less experience overall. However, while they may be easier to obtain, they can often come with higher than average interest rates and various fees that need to be taken into account as well.
A term loan, sometimes known as an installment loan, is a classic form of business financing that can be obtained from banks, credit unions, and alternative lenders too. It functions just like any other kind of loan, except that you have a fixed term, during which the loan must be repaid. The term can be as short as a few months or as long as several years.
One of the various benefits of opting for a term loan is that you know exactly how long you've got to pay it back, allowing you to manage your finances accordingly, and choosing online lenders lets you find a loan that really works for you, with amounts and interest rates that meet with your company's current budget and future expectations.
Every business needs funding to purchase equipment, and while bank loans are one of the most commonly chosen options, they're not the only answer. So, if you aren't able to qualify for a business bank loan or need something a little different, remember that all of the above options are available to you, each with their own advantages and features.