A previous article, How to Finance a Small Business, offered a few traditional and popular options for small business owners seeking loans or financing to improve cash flow. The following methods of finance either draw on business-based assets or take advantage of business-based relationships:
Accounts Receivables Financing
Accounts receivables financing is an asset-based financing arrangement in which a company uses its outstanding invoices as collateral for short-term financing. A company can either choose to finance their accounts receivables or factor them. In the first option, the lender offers a short-term loan against the outstanding invoices, but the lender does not own the invoice and does not assume responsibility for collecting the outstanding debt. With accounts receivables factoring, the lender assumes responsibility for collecting the outstanding receivables from your customers.
Business Cash Advances
A business cash advance is a form of receivables financing that is based on future credit card sales. The cash advance company purchases a portion of these credit card transactions from the business at a discount. The business then receives an instant lump sum of capital, while the financing company collects a fixed daily percentage of the business' credit card sales until the full agreed upon amount is paid off. While the interest rates for this form of financing tend to be a bit high, the approval process is relatively quick and easy and there are few requirements for funding.
Busines Equipment Leasing and Financing
By leasing their equipment, instead of purchasing it, businesses can free up their working capital and thereby take advantage of opportunities to expand or improve operations. They also can avoid purchasing equipment that will soon become obsolete or inadequate. There are several equipment lease financing options available to small businesses, so be sure to do a little research.
Vendor- Based Business Financing
Business owners who have a strong working relationship with any of their vendors, may be able to access vendor financing. Vendor financing is a loan arrangement between a business and its vendor. The vendor in this case specifies an amount that will be loaned to the business receiving it products, complete with terms and conditions regarding the repayment of the loan within a specified period of time.
Taking on a Business Partner
Just as two heads are better then one, so too are two sets of pockets. Business owners can increase their asset pool by having someone invest in their company as a partner. The investor can be either an active partner or a "silent" one who is not involved in the business' daily operations.
Seller Financing for Purchasing an Existing Business
Those who are considering buying a pre-existing business or franchise may have access to seller financing. Sellers of small businesses generally allow the buyer to pay some of the purchase price of the business in the form of a promissory note. Sellers will usually finance between one and two thirds of the sale price that can be paid back with interest over several years.
In short, small business owners looking to finance their company's operations or growth have several options to choose from. Business owners should be sure to consider those methods that are the most suitable for their circumstances and where necessary seek the advice of a qualified professional.
Susan Brown - Susie Brown is a small business consultant and freelance writer specializing in business and personal finance.
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