When most people think of business financing, the first thing that probably comes to mind is traditional bank lending. However, as the financial market changes, more and more small business owners are finding it difficult to qualify for a traditional bank loan, particularly if their companies have not been in business for long or if they have little credit. For this and other reasons, many small company owners are turning to several types of non-traditional business financing, including invoice factoring, micro-loans, and peer-to-peer lending. What are these financing options? Are they a good idea for your business?
What is Invoice Factoring?
Invoice factoring isn't actually a form of lending. Rather, companies that factor invoices are essentially getting a cash advance by selling the value of their current invoices to a third-party financier. The third-party company issues the business a check for up to 90 percent of the invoice. After the customer pays off the note, the company sends the rest of the invoice amount to the business, minus its fee. Factoring is often used by company owners who don't have much credit, since they're able to qualify for it on the creditworthiness of their customers.
What are Micro-loans?
Yet another type of non-traditional business financing is the micro-loan. As the name implies, a micro-loan is a loan for a smaller amount of money than is typically offered by a bank or a lender. Generally, entrepreneurs turn to these loans if they're unable to qualify for a standard loan amount for some reason. Some of these micro-loans are offered by traditional banks, but many are also administered by local credit unions.
Is Peer-to-Peer Financing a Viable Option?
Peer-to-peer financing is a financing option that has grown in popularity in recent times, particularly after the credit crisis made it more difficult for small business owners to get standard financing. When a company owner uses peer-to-peer financing, he or she applies for lending from an online lending club that is made up of other business owners. Even though the arrangement is more casual than a typical lending option, the requirement process is still fairly lengthy and typically requires a certain credit score.
Non-traditional business financing may prove to be a lifesaver for small business owners who run into financial trouble. By finding out about these types of financing in advance, entrepreneurs can decide if these types of non-traditional business financing are a good fit for their company needs.
