Small business owners are feeling optimistic—any number of surveys has shown that. But despite that optimism, CNN notes, they are by and large not looking for small business loans. The most recent Private Capital Access Index shows demand for loans is down by 12 percent compared to 2012, with more than half (52 percent) of small business owners surveyed reporting they won’t seek financing in the next six months.
What gives? Several theories exist:
Perhaps small business owners are optimistic, but still don’t have enough need for capital to take out business loans.
Perhaps they’re gun-shy after the Great Recession, when so many banks called loans and tightened their lending standards. Or perhaps these small businesses are able to finance their current activities with only their own capital.
If you’re planning a business expansion in the coming year (and I hope you are), it’s smart to have access to capital before you actually need the money. If you don’t want to approach a bank for a traditional small business loan, there are plenty of alternative lending options out there.
Though crowdfunding has gotten lots of attention in the past few years, there are many financing methods that, while not as “sexy,” are more reliable. Here are a few to consider:
Equipment financing: Much like taking out a car loan, in equipment financing the equipment itself serves as collateral for the loan. You’ll typically have a fixed monthly payment, allowing you to spread out the cost of needed business equipment over a longer time period than buying it outright.
Invoice-based financing: Factoring—in which a factoring company buys your accounts receivable for a percentage of their value, then handles collecting on the accounts—is the traditional method of invoice financing, but more flexible variations are popping up all the time. Companies such as BlueVine, Fundbox and Dealstruck offer invoice-based financing plans to suit your needs, but all have one thing in common: you can get paid right away instead of waiting for customers to pay you.
Purchase order financing: Sort of the opposite concept of factoring, which advances you cash based on product you’ve already sold, purchase order financing advances you cash to buy materials or products for which a big customer has given you a firm purchase order. In essence, the product you’re buying is the collateral for the loan.
Merchant cash advance: If your business is new or doesn’t have the greatest credit rating and you do a lot of your sales using credit cards, a merchant cash advance on future sales can give you access to quick capital.
Unsecured business line of credit: Similar to a home equity line of credit, a business line of credit doesn’t have to be used until you need it. Once you borrow on the line of credit, you’ll need to start paying it back. Once it’s paid off, you can borrow on it again. This is a good tool to have in your pocket to cover unexpected expenses of growth.
Be aware, many of these alternative financing methods cost more than traditional small business loans, meaning they shouldn’t be used without a good reason. However, the approval process is much faster than traditional loans (as short as 24 hours in some cases), making alternative financing options a good way to get the money you need quickly and easily. It takes money to make money—so make sure you have access to the money you need to take advantage of opportunities to grow your business.
Your SCORE mentor can explain your financing options and help you select the right choice for your business. Visit www.score.org to learn more.