Part two: Nontraditional sources of business financing to start or expand your business
If a loan or line of credit from your bank is not available for your business, the following options could help with money to expand a business.
If you're ready to grow and expand your business, you might need a little help. In part two, we'll give you a few examples of financing options to consider.
Vendors and suppliers
Vendors can extend credit to businesses, which means you can pay suppliers for goods or services 30 or more days after they've been provided. But to earn this trust from vendors and suppliers, you'll need to demonstrate that you can make timely payments, and it usually takes time for vendors to increase your line of credit and payment period. This option is always advantageous to have, even when you don't need it. Someday, when you need extra money, you will have already established that relationship and trust.
In certain types of businesses, it's customary to ask customers for prepayments, which can be considered a type of financing. When you have to manufacture, build, or design something for that customer, you'll have advanced payment to cover your costs. You can purchase the materials, pay for the labor, and account for your time.
These companies purchase equipment and rent it out. Occasionally, upon completion of the contract, you can purchase the asset for a pre-established amount.
One of the tax advantages of this option is deductible rental payments. Additionally, if you are thinking about changing out your equipment, and you aren't interested in keeping it, then this could be a viable alternative to purchasing new equipment. Ask other business owners, so that they can help you analyze this option. One of the disadvantages is that when you sign the contract, it is very difficult to back out, since you commit to the agreed-to monthly payments.
In factoring, there are several variations, but this scenario is one of the most common ones: Factoring companies buy invoices or accounts receivable. For example, if you manufacture and sell furniture, the customers may take 30, 60, or more days to pay you, so you may still need money to continue operating. You can sell your invoices to factoring companies, which will advance you a percentage — in the range of 70 percent to 95 percent depending on the volume, risk, and time involved — of the invoice amount.
After they collect on the invoice, they give you the remaining funds, keeping a commission — between 1 percent and 5 percent per month, depending on the company. This type of financing can be very expensive. So, research your options, and compare different companies to decide which one is right for you. Carefully analyze each of these financing options; some may even be used at the same time. But, you must always be aware of the costs of each of financing route.
Also, take care of your credit history and pay down your debt. For many companies, growth depends on the ability to acquire credit, which is earned over time.