Any small business owner will tell you that your success will often hinge on the amount of capital available to you at any given time. Expenses such as payroll, inventory, and rent can be a significant drain on your resources which is why it’s essential that you understand of all of the funding options available to you.
In many cases, business owners will turn to traditional funding options such as small business loans, credit cards, and lines of credit to fund their operations. However, traditional funding isn’t always the best course of action for everyone.
Let’s take a look at several alternative funding options that you’ve probably never heard of.
Microloans are a viable funding alternative for those who don’t need a massive amount of upfront capital. Microloans tend to range up to $50,000, with most customers borrowing around $6,000. Eligibility requirements tend to be far less strict than those required for a traditional bank loan, and the borrower doesn’t have to worry about putting up collateral. However, you’ll end up paying for this convenience with higher interest rates. Microloans are an excellent option for businesses that have less than stellar credit.
Taking on debt isn’t the only way to raise capital. Crowdfunding serves as a viable alternative to traditional loans. When crowdfunding, businesses accept small investments from their customers until they reach a specific financial milestone. In return for their investment, customers will typically receive special perks such as significant discounts or free products. Crowdfunding is not only a great way to raise capital without getting into debt, but it also allows you to raise funds quickly.
3) Invoice Financing
Some businesses, such as those offering consultant services, have regular customers but irregular cash flows. Invoice financing can help you get the funds you’re owed a bit quicker. Be careful not to confuse invoice financing with invoice factoring, which involves selling your accounts receivable to a lender (commonly referred to as a “factor”) at a reduced price.
Invoice financing, on the other hand, involves using your accounts receivable as collateral for a loan. When your customers finally pay, you can pay off the loan. Be mindful you’re still on the hook for paying back the loan whether your customers pay you back or not.
4) Merchant Cash Advance
If you have an immediate need for fast cash than a Merchant Cash Advance (MCA) may be the best option for you. Because MCAs focus primarily on incoming revenue, business owners who have past bankruptcies or low FICO scores can still be approved for funding.
When it comes to paying back the lender, a predetermined percentage will automatically be deducted from your daily sales until the debt has been paid.
The one downside to MCAs is that the associated fees are typically higher than other types of funding options. However, many businesses consider the quick availability of funds and hassle-free application process to be worth the extra expense.
5) Your 401(k)
If you desperately need capital and you have a self-employed or small business 401(k) you may be able to use that to bankroll your business operations. Borrowing from your 401(k) is generally not advised because you’ll typically take a hit on your taxes and may be putting your retirement at risk if your business goes under, so consider this option a last resort.
You typically will have five years to pay back a 401(k) loan, at an interest rate of prime plus 1%. If you can’t pay it back within five years, your loan will be treated as an early withdrawal, which means (unless you are 59½ years old or older), you’ll pay a significant fine, plus have a sizable tax debit.
There are many ways to access funding for your business. Take time to research all of the options available to you so that you can find the right option for your needs.
If you need quick working capital from a reliable funder turn to One Park Financial. We partner with an extensive network of funders who specialize in working with small business owners. Apply today to get started.