Getting a personal or a small loan sanctioned for one’s business is not a piece of cake, especially now when the international economic world is still recuperating from its meltdown. But that does not translate to sheer desperation for start ups or small business owners as we have always seen that if there is a demand for something, someone will cater to it. Hence, there has sprung up a market to cater to the small loan needs of such customers, and it includes a number of options, 3 of which are as follows:
- Option 1: Factoring- Factoring is a kind of lending in which a business, seeking a loan, sells its accounts receivable (i.e., invoices) to the lending party. This is also known as the accounts receivable financing. The lenders pay around 80 percent of the value of the invoices up front. In short, if you sell an invoice of $100 to a factor, you’ll receive $80 immediately. Then the lender collects the payments directly from your clients, takes out his fees and passes the remainder to you. This process gives immediate clearance for funds and can extend help to even those who have less than perfect credit score. This is because the lenders are interested in the creditworthiness of the borrower’s clients for repayment.
*Note – However, it is denied to those who have less than a 25% (approx.) margin of profit in their item of sale. It is usually used by wholesalers, drop shipping companies, distributors or other resellers fall.
- Option 2: Crowdfunding – it is one of the outcomes of the Internet’s permeation into every aspect of our life. Crowdfunding sites include the likes of Kickstarter and Indiegogo, which have gathered immense popularity over the last couple of years. This novel method of financing allows borrowers to showcase their business ideas over the net following which convinced consumers donate money to them, in exchange for the first access to that future business’s products. In fact a recent change in the U.S. federal law has facilitated trading of equity for an investment in such ideas through Crowdfunding, thus widening the range of investors available. This method helps the start ups to establish their business without incurring massive debts or handling over the administrative rights of their business to the lenders.
*Note -The problem with this mode of financing is if you fail to gain the support of investors, word spreads quickly, and you get a bad reputation. Nonetheless, on such instances you do get the feedback required to know your shortcomings and work on them.
- Option 3: Merchant Cash Advance – A merchant cash advance (MCA) is a kind of cash advance that a business gets on the volume of that its monthly credit card transactions. Usually an advance of up to 125 percent of the total monthly dealings’ volume averaged over the previous 4 months is made. For repayment while some lenders withdraw a fixed amount out of a merchant account every day till the completion of the premium of the interest, the others withdraw a portion of the credit card the business receives daily (they take around 5-10% of every transaction till full repayment). The funding is easy and clears within just a few days, and can be maintained easily due to its flexible regulation procedures. A further plus is that here the credit standing of the borrower does not matter, rather the sale volume does.
*Note-The interest rate is something to be watched out for as it can range from 5%-30%.
Apart from these three, there are many other forms of such financing available today; you check them out on similar sites.