Accounts Receivable Financing

The Ultimate List of Funding Options Every Small-Business Owner Should Know About

It’s a big world out there. We’re talking the world of funding for small- to medium-sized businesses. That’s why we’re giving you a bird’s-eye view of the available options—everything you need to know about funding your business.

Invoice Factoring

You may have heard of it; maybe you know a company or two that use it. But what exactly is invoice factoring?

 

Invoice factoring can be a welcome relief for a small business or government contractor—or any business owner tired of waiting for their invoices to be paid. You simply sell your invoices at a small discount to a factoring company and get immediate cash for your business. According to the Wall Street Journal, “Now billions of dollars in accounts receivable flow through factors each year.”

 

Should you consider invoice factoring for your small business?

Here’s what you should know about invoice factoring before diving in. Invoice factoring virtually eliminates cash flow problems. There’s no need to process invoices and wait—and wait—to get paid by your clients. No more putting plans on hold because there’s just not enough money to put them into effect. Or worrying about meeting payroll because you haven’t been paid yet. Non-recourse factoring even reduces bad debt since the factor assumes all risk if the invoice isn’t paid.

 

Got bad credit? Bank loan application already declined? No worries. Invoice factoring companies look at your credit and business history differently than a bank would. They base the majority of their decision on the quality of your customers’ credit and business history, not your own. The downside? Invoice factoring can have higher fees than traditional financing, but it can be well worth it when you consider its many advantages, including being able to sleep at night.

 

Whom should you trust?

It’s important, of course, to work with a reputable factoring company like Triumph Business Capital. Since 2004, Triumph has provided factoring for over 7,000 small to mid-sized businesses like yours—from the transportation industry to staffing agencies, government contractors, and other small businesses.

 

If your business has grown to the next level and you’re looking for a larger loan to pay for new equipment or provide additional working capital, Triumph also offers smart Asset Based Lending, Equipment Financing, and a discount fuel card program.

 

SBA Loan

The U.S. Small Business Administration (SBA) can also help finance your business with a guaranteed loan issued through participating banks and other lenders.

 

The most popular type of SBA financing is a General Business Loan, otherwise known as a 7(a) Loan. You can use the funds to establish a new business or assist in the acquisition, operation, or expansion of an existing business. The SBA guarantees loans up to $5 million to help small business owners with major investments, like building new facilities or buying land, machinery, and equipment. The SBA also offers loans that help small business owners affected by natural disasters and other kinds of emergencies.

 

Should you consider an SBA loan for your small business?
If you don’t qualify for a traditional bank loan, the government can help—although you’ll still need to work primarily with a bank. Aside from a low annual percentage rate (APR), you’ll receive funding in less than a month. Also, you’ll have more time to repay an SBA loan. If you use the loan for working capital or daily operations, you’ll have seven years to pay it back. Buying new equipment? You’ll have up to 10 years. If you use the funds for a real estate purchase, the terms go up to 25 years. A longer loan term means a lower interest rate and lower regular payments.

 

The application process, however, can be daunting. An SBA loan requires good credit and may call for collateral—and the paperwork can be both lengthy and cumbersome. The best way to navigate the process is to work with a bank that has extensive experience with SBA loans. The advantage? Lenders offer flexible terms and low rates since the federal agency guarantees the loans.

 

Alternative Lending

You’ve probably seen advertisements for alternative lenders like Kabbage, OnDeck, Lending Club, Prosper, Street Shares, and Deal Struck. Even PayPal has become a major player in the alternative lending space.

 

Alternative lending is a saving grace for some small businesses—especially if they need cash fast, or if bad credit disqualifies them for traditional lending. Sometimes referred to as “direct lending,” alternative lending provides cash in hand within two to three days on average, with a 12- to 36-month repayment period. And there’s no restriction on how to use the money.

 

Merchant Cash Advance (MCA)

MCA is an alternative financing source that provides businesses with a lump sum of cash by purchasing a set amount of their future sales. MCA companies debit your business account on a daily basis until the loan is paid in full.

 

Sound like invoice factoring? Not quite. Merchant cash advances and invoice factoring are both alternatives to traditional financing. Each involves a simple, quick application process with minimum credit requirements, making it easier and faster for small businesses to get approval—but while merchant card advances may seem like an equal option to invoice factoring, there are several catches.

 

Primarily, if your receivables are inconsistent, you may not have enough cash in the bank everyday that a withdrawal is made. At that point, you’ll overdraft on your account and experience the fees and penalties that follow.

 

Should you consider merchant cash advance for your small business?

Merchant cash advancements typically involve more risk than invoice factoring. A merchant card advance charges you based on your projected sales, while invoice factoring companies purchase your existing invoices. Since merchant cash advance payments are solely based on a prediction, rather than an actual dollar amount, this means that if your future sales don’t meet your projections, you could end up making large payments, with a much higher interest rate—usually significantly more than invoice factoring.

 

The larger problem could be that the payments continue for a period beyond your revenue generation. This form of cash advance is typically associated with incredibly high interest rates and should be avoided if at all possible.

 

Should you consider an alternative lending source for your small business?

The process for applying for alternative lending is fast and often easy. The loan application can be completed entirely online and approved in just a few minutes. Approval rates for alternative lending are much higher (64 percent, as opposed to about 20 percent for big banks, according to Inc.), and you could have your money in a matter of days, rather than weeks or months. Typical lending ranges from $10,000 to $100,000.

 

But alternative lending can be costly. In fact, the cost of these loans can be significantly more than the annualized rates associated with conventional financing. If your loan is a payday loan, beware. Your payment will be withdrawn from your checking account every single day. If the money isn’t in your checking account, you’ll accrue additional fees, increasing the payoff amount and delaying the payoff date. Another thing to keep in mind—be sure you’re working with the lending company that actually provides the financing, versus dealing with a broker, which leads to substantially more costs.

 

Microloans

Heard of microfinancing? It’s the new buzzword in funding circles, yet its concept dates back over 200 years. The first case of microlending, attributed to the Irish Loan Fund system introduced by Jonathan Swift, sought to improve conditions for impoverished Irish citizens.

 

So what is microfinancing? According to Investopedia, “Microfinancing provides options to customers with limited resources to promote participation in productive activities or to support a small business.” Simply put, it’s a type of banking service for unemployed or low-income individuals or groups who have no other access to financial services. Some microlenders even provide information in the areas of financial literacy, such as understanding interest rates and managing financial risks. Several organizations, including the Small Business Administration, offer microloans to help emerging businesses and underserved individuals get solid financial footing to start and grow their businesses.

 

The SBA offers microloans of up to $50,000 with a maximum term of six years. Administered through community nonprofits, the loans can be used for working capital or for the purchase of inventory, supplies, furniture, fixtures, machinery, or equipment. You can’t use the funds to pay an existing debt or to buy real estate.

 

Here’s how SBA microloans work: The SBA makes funds available to specially designated intermediary lenders—nonprofit organizations with experience in lending and technical assistance—including Justine Petersen, Grameen America, and Access to Capital for Entrepreneurs, to name but a few. These intermediaries then make loans to eligible borrowers. But before these lenders consider an application, qualifying for SBA microloan financing may require borrowers to complete specific training or planning—requirements designed to help you launch or expand your business successfully.

 

Other independent organizations—such as Bentley Microfinance Group, Association for Enterprise Opportunity, Business Center for New Americans, and Opportunity Fund—also provide microloans to the underserved community outside of the SBA model.

Should you consider a microloan for your small business?

A microloan is easier to get than a traditional loan, especially if your credit report is less than perfect or you don’t have a long credit history. If you don’t have a credit score, you can opt for a credit-building loan that lets you establish credit. On the other hand, a microloan usually costs more than a traditional bank loan.

 

Additional Government Funding Options

The federal government isn’t the only agency that can help your small business get off the ground and grow. Every state and many local governments have economic development agencies dedicated to helping both new and established businesses to grow and succeed. These agencies offer such services as start-up advice; training and resources; financial assistance through loans, grants, and tax-exempt bonds; business location and site selection assistance; and employee recruitment and training assistance.

 

Some states also provide grants for expanding childcare centers, creating energy-efficient technology, and developing marketing campaigns for tourism. These grants usually require the recipient to match funds or combine the grant with other forms of financing, such as a loan. The amount of available grant money varies, depending on each grantor and the type of business to be funded.

 

In addition to loans, the SBA also offers grants to nonprofit and educational organizations in many of its counseling and training programs. However, the SBA does not provide grants for starting or expanding a business.  

 

Here’s another way the government can help put dollars into your business. The Small Business Lending Fund (SBLF), enacted into law as part of the Small Business Jobs Act of 2010, provides capital to qualified community banks and community development loan funds (CDLFs) to encourage small business lending.

 

What does that mean to the small-business owner? Your community bank can be a resource for commercial and industrial loans; owner-occupied nonfarm, nonresidential real estate loans; loans to finance agricultural production and other loans to farmers; and loans secured by farmland.

 

If you’re in the biomedical space, the National Institutes of Health (NIH) can be another resource for your business. The NIH is the largest public funder of biomedical research in the world, offering funding for many types of grants, contracts, and even programs that help repay loans for researchers.

 

Should you consider government funding for your small business?

Government funding may come with free technical assistance, including workshops, seminars, or onsite consultations. Sometimes government agencies bring together all the recipients of a particular grant, facilitating peer-to-peer learning. These gatherings often provide grantees with their first introduction to others delivering similar services in the same city—which, in turn, can lead to more potential funding or resource-sharing opportunities.

 

However, as you’d expect, a great deal of red tape goes hand-in-hand with government funding. We’re talking time-consuming paperwork, meticulous recordkeeping, and demanding reports. And you can anticipate that the agency providing government funds for your program will closely monitor the use of those funds. It’s also possible that the receipt of government dollars will discourage donations from private sources.

 

Crowdfunding

It all started in 1997, when a British rock band funded their reunion tour through online donations from fans. Since then, crowdfunding has become a smart option for entrepreneurs and others to raise money, awareness, and support for a business or a project, especially when turned down by traditional lenders.

 

Through online platforms like Kickstarter, Indiegogo, Fundly, RocketHub, and Fundable, your small business can receive needed funding, with donations ranging from as little as $5 up to $5,000 and more. In exchange, your business offers rewards like T-shirts, tickets to shows, or perhaps a personal call from the founder of the company. The better the reward, the better the chance of donations.

In addition to soliciting donations, you can use the crowdfunding concept to get a loan. The site LendingClub, for example, allows members to directly invest in and borrow from each other, essentially eliminating the banking middleman.

 

Should you consider crowdfunding for your small business?

According to the research firm Massolution, the estimated fundraising volume for global crowdfunding is a whopping $34 billion. But while there’s money to be had, crowdfunding has its drawbacks as well. If you don’t have a great story to tell or a terrific product to sell, then your crowdfunding bid could fail. Some crowdfunding sites don’t collect money until a fundraiser reaches the goal. If your efforts fall short, you’ve wasted a lot of time, energy, and other resources. And then there’s the risk of getting sued if you fail to deliver your rewards.

 

Venture Capital

VC—venture capital—spells big bucks to some companies. An entrepreneur will seek this type of equity financing when the company’s size, assets, or stage of development precludes more traditional funding sources, such as public markets and banks. Venture capitalists generally invest cash in exchange for shares as well as an active role in the invested company.

 

Should you consider venture capital for your small business?

Venture capitalists typically focus on young, high-growth companies, invest equity capital rather than debt, offer a longer investment horizon than traditional financing, and actively monitor the companies in their investment portfolios. Lenders like EarlyShares and MicroVentures generally require some equity cushion or security (collateral) before they will lend to a small business.

 

Venture capital provides businesses a financial cushion, but at what cost? Equity providers have the last call against the company’s assets and require a higher rate of return or return on investment (ROI) than lenders receive. So it’s vitally important to weigh the pros and cons before engaging in a venture capital relationship.

 

Angel Investment

Many startups opt for an angel on their shoulder. Angel investors provide funding for early-stage or startup companies in exchange for an equity ownership interest. Often referred to as a business angel, informal investor, angel funder, private investor, or seed investor, the typical angel invests anywhere from $25,000 to $1.5 million.

 

How do you find an angel investor? Forbes lists a variety of ways—through other entrepreneurs, lawyers, and accountants; AngelList; crowdfunding sites like Kickstarter and Indiegogo; or through a colleague or friend of an angel.

 

Check out organizations like CircleUp or Gust that provide online platforms to connect entrepreneurs with angel investors. CircleUp offers the largest online marketplace for investing in innovative consumer and retail companies. Gust connects startups with over 1000 investment groups around the world, resulting in more than $1.8 billion invested in startups to date.

 

Should you consider angel investment for your small business?

Angels can be a Godsend for a startup and the investment usually comes in the form of a lump sum. However, angel investors expect a high rate of return, often 25 percent or more. And as a major investor, your angel may also feel entitled to some control over your company’s future.

 

The Bottom Line

At the end of the day, when you’re considering how to fund your business idea, the best option is one that helps you achieve your business objectives with minimal risk or high rates. That often turns out to be invoice factoring with Triumph Business Capital. Triumph believes the hardest part about your job shouldn’t be getting paid. Get paid today.

 

Have questions about invoice factoring or the options listed above? Please leave us a comment below.