Making a Case for Unconventional Small Business Financing

Small Business Financing

The following article provides insight into four lending and financing options for today’s small business owner. The article covers receivables factoring, purchase order financing, equipment leasing and social lending.

Making a Case for Unconventional Small Business Financing

Despite historically low interest rates, small businesses everywhere are confronting issues of skyrocketing financing costs and many are at a loss as to why. So, how is it that interest rates are low, but financing costs are high? To answer this question, think of a company’s cost of capital and how those costs increase the longer it takes companies to collect on invoices.

Think of how that cost of capital is further impacted by holding inventory for extended periods or having an uneven cash flow position. Regardless of how low interest rates are, companies are still faced with mounting costs due to delinquent customer payments.

One of the major causes of high financing costs pertains to how long it takes companies to collect on invoices. With an economy slowed down by decreased demand, customer bankruptcies and the overall uncertainty of global markets, small businesses are struggling with poor cash positions and mounting bills. Therefore, given the severity of the situation, can anything be done?

Options for small businesses to finance their activities

More importantly, are there any options to financing for today’s small business owner other than dealing with banks and credit unions? In fact, there are! Today’s businesses need not accept the status quo. There are several asset-based lending options that allow small businesses to assume a more dominant role in financing their operations.

1. What is accounts receivable factoring?
Every receivable has a value to a company. Unfortunately, that value depreciates over time. The longer it takes customers to pay, the bigger the impact on gross profit. A company’s cost of capital is offset by using receivable factoring because it allows companies to do away with delayed customer payments with immediate, upfront cash advances based on the value of the receivable.

Companies no longer have to lose money waiting for customers to pay. Instead, the financing company advances capital based on the invoice’s value.

2. What is purchase order financing?
Another asset-based lending solution is that of purchase order financing, which is similar to factoring with the exception that the company is able to secure capital upon receipt of a customer’s order. This capital can then be used to finance the order, pay vendors and creditors and move forward with order fulfillment.

Again, once the customer pays the invoice, the company is reimbursed the difference between the initial advance and the final collected amount.

3. The power of equipment leasing
Leasing equipment allows companies to retain more capital on hand. Instead of rolling the dice with an outright purchase, companies can instead finance their depreciating assets with equipment leasing. However, it’s wrong to assume that equipment leasing should only be used on large capital expenditures.

Today’s leasing options empower small business owners to lease everything from cell phones, computers and laptops, to printers, photocopiers and fax machines. Caution: Know the effective interest rate of your lease.

4. The power of social lending
There are many online social lending options that are available for business owners to pursue. Peer to Peer lending involves person-to-person loans without the intervention of a traditional financial institution.

Granted, business financing will always pose challenges. However, unconventional financing empowers companies to assume a more proactive role in managing their daily finances. Instead of being at the mercy of banks, credit unions, financial markets and slow paying customers, companies can move forward and finance their own operations.