Imagine the situation where you have a business, or you want to have one. You’re going to need a lot of money and your savings are obviously not enough. What’s your first thought? Yes, go to the bank and take out credit. Sounds pretty good, but sometimes it’s easier said than done. When the credit market gets tight, you have to look for other options. Today we’ll discuss the five alternative ways to borrow money and then you will be able to choose the one that suits you best. Let’s get going!
1. Factoring, or accounts receivable financing
This is an oldie, but a goodie, in the way of in-house financing. To make it clear, factoring is what happens when a company sells its invoices to a financial institution, called a ‘factor’. In this case, the factor usually advances funds in the amount of 80% of the receivables’ face value and keeps the 20% as the reserve.
Then the factor performs the transactions and executes payment collections. For these services and the provided funds, the factor may take more than 20% of the receivables’ face value from the borrower. When the accounts are paid, the borrower gets the difference between the face value and the reserve.
One of the significant advantages of factoring is quick access to cash. Aside from that, if the business grows steadily, the accounts receivable will continue to come. If this sounds tempting for you, make sure you choose a reliable factor.
2. Peer-to-peer lending
It’s always great to have someone who believes in your success. Friends, relatives, good acquaintances or those who are simply interested in your business, can become your peers and give you a loan. This type of lending can be officially arranged, formal, or informal.
Besides the very quick access to the needed funds, you may get very flexible repayment conditions. Still, keep in mind that even if the lending seems serene, there can be some obstacles. For example, your peer-to-peer investors may want you to give them huge discounts for your products or services in return for the provided loan.
There is also another version of peer-to-peer lending, the social marketplace. Using this type of money borrowing, you can get a rather low rate for risky business ventures and flexible terms of repayment, in comparison to other lending options. If you want to use the social marketplace to ask for a loan, you just place your request online using one of the many available platforms. Prospective lenders bid for your loan, offering to provide the needed amount at a specified interest rate.
In this case, you have the opportunity to choose and accept the offering with the lowest rate and the mildest repayment conditions. As always, this option has its drawbacks. The most crucial one is that you probably don’t know your lender and you have to make your loan requirements public.
3. Hedge fund lending
Often called ‘the new corporate ATMs’, hedge funds provide loans to risky businesses, such as start-ups or technology companies. The loan size is established according to the quality of pitch that the borrower makes.
With the hedge fund lending, you can get the desired funds rather quickly. The risks of addressing hedge funds are the high borrowing cost. Also, there have been cases, in which hedge funds provided risky loans in order to find out the important internal information and use it for their own trading purposes.
4. Customer lending
This scenario presupposes that your lender is your customer. How does it work? Well, it all began in the early 2000s with CSAs, or the community supported agricultural loans. The idea was that the customers of the farms loaned money to the farms before the planting season. In return, they received harvested products at a discount price.
Time passed, and the solution found wider application area. Today it’s also an efficient method, but it’s not suitable for everyone. To borrow money from your customers, you need to conquer their trust and prove yourself as a reliable product or service provider. And, as we all know, that takes time.
5. Credit card lending
Credit card financing is often a solution applied to launch a new business. The credit card issuer loans you the required sum and you should repay that loan later in addition to paying a particular interest rate. Credit card lending provides you with easy and quick access to cash, especially if your credit history is not spoiled and deserves trust.
As is usual in seeking finance, credit card lending is not so perfect. The available credit is often limited according to the borrower’s estimated ability to earn money to repay the debt. Also, credit card rates are traditionally high, and in the case of payment delay, you may face huge penalties. Besides all that, missed payments will spoil your credit history.
To conclude we can admit that if you can’t take a credit from a bank, the war is not over and you still have chances to win. Today, we’ve shown you five alternative examples to financing your business initiatives, but there are many more. Take your time to carefully consider all the pros and cons, and choose the one that’s best for you.