4 Types of Alternative Lending for Businesses

Getting the cash a company needs to remain profitable in the long run can be difficult when traditional routes to financing have been exhausted. In order to obtain the money needed to grow a business, companies can explore alternative lending options to keep the cash flowing.

Peer-to-Peer Financing

Businesses that have money to lend have now turned to the Internet to offer small, short term loans to their peers in order to reap the benefits of lending. Most companies are not willing to take on a high level of risk, so this alternative to borrowing money from a bank or other financial institution is geared toward a specific set of businesses with good credit.

Borrowing through peer-to-peer financing is typically done through an online lending club, and credit risk will be assessed by the lending club to help businesses match up with lenders who are willing to provide financing. Since these loans tend to be for small amounts of money, peer-to-peer financing is ideal for financing one-time expenses.

Inventory Financing

Inventory financing tends to be more expensive than a traditional bank loan, but it is a technique of receiving financing when a company cannot be approved for a typical loan. Instead of being approved based only on creditworthiness and the overall value of the company, inventory financing uses the inventory of the company as collateral.

This form of financing may be used to secure inventory to provide customers with a wider selection of products. A lien is placed on the inventory in this case, and some inventory financing agreements even involve allowing inventory to be kept in a third-party warehouse that is regulated by the lender.

Inventory financing is ideal for small businesses that want to make inventory available to their customers without taking on traditional debt to do so. Mid-sized businesses that would like to expand their product offerings can also benefit.

Invoice Financing

Invoice financing encompasses 2 types of financial services, factoring and discounting. Both factoring and discounting enable a business to release funds that are tied up in unpaid invoices. These services involve a factoring company to advance money against a business’s debtors.

There are many differences between factoring and invoice discounting:

• With factoring the factoring company takes responsibility for the business’s sales ledger, chasing debtors to pay invoices, credit control, and payment processing. A business’s debtors are aware that a third-party is involved during a factoring transaction.
• With invoice discounting the business remains in control of their sales ledger, collections, credit control, and payment processing. The factoring company simply provides a financing facility. Most of the time a business’s debtors are unaware that a third-party is involved.

Factoring companies have vast experience in credit control, cash-flow management, and collections. Many times a factor can improve a company’s invoice turnover rate by several days, increasing profits by several points.

Microlending

Some local small business associations sponsor microloans that are available to smaller companies in the area in order to encourage local business growth. Companies that are just starting out are often considered for these microloans because they would not be eligible for a traditional business loan through a bank due to a lack of credit history.

Businesses that opt for microlending are often considered to be high risk, but the risk is mitigated by subsidies that are provided by local government entities. These are small loans that are typically intended to be short term in nature, and the understanding is that the business will use the microloan as a boost to start up a lucrative company that benefits the community.

Small and mid-sized companies are often discouraged by a lack of financing options available to these types of businesses, but there are alternative financing options available.

This helpful guest post was sponsored by cbacfunding.com.

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