Alternative Financing Options for Small Businesses

Why owners look beyond the bank

Banks often want long operating history, strong credit, collateral and weeks of review. Alternatives trade lower cost for speed and flexibility.

A traditional bank loan or SBA loan is usually the lowest-cost option. But it asks for tax returns, detailed financials and time. A seasonal business with thin collateral, an owner rebuilding credit or a company with a time-sensitive opportunity may not fit.

Alternatives look more at recent revenue and bank statements. They fund faster. They also usually cost more, so the key is to use them for something that pays back clearly. For the bank side, see SBA loans and small business loans.

Working capital and revenue-based financing

Working capital gives a lump sum for operations. Revenue-based financing ties repayment to your sales, so payments rise and fall with revenue.

Working capital funding suits inventory, payroll gaps and opportunities. It can fund the same business day on approved, complete files. Revenue-based financing takes a share of sales until a fixed total is repaid, which eases pressure in slow periods.

Many of these use a factor rate rather than an interest rate. A 1.3 factor on $50,000 means $65,000 repaid. Convert it to an annual rate to compare. See what a 1.3 factor rate costs.

Lines of credit and term loans

A line of credit is revolving: draw, repay, redraw. A term loan gives a lump sum repaid in fixed installments over a set period.

Use a line of credit for uneven needs, with funding in 24 to 72 hours. Use a term loan for one-time projects where you want predictable payments, funded in 1 to 5 days. Our comparison of a term loan and a line of credit explains the choice.

Equipment financing

Equipment financing uses the machine as collateral, which can make approval easier and keep the rest of your assets free.

If you are buying a vehicle, oven, press or medical device, equipment financing matches the repayment to the asset, funded in 2 to 7 days. Leasing is a variation worth knowing; see equipment leasing. If you already own equipment outright, you may borrow against it in some cases.

Options ROI Funder does not place

Invoice factoring, business credit cards, crowdfunding and investor equity are real alternatives, but ROI Funder does not place them. Know their tradeoffs.

• Invoice factoring. Sells unpaid invoices for cash now. Works only for business-to-business invoices. See understanding invoice factoring.
• Business credit cards. Good for small, quickly repaid purchases. Costly if you carry a balance. See should you open one.
• Investors and crowdfunding. No monthly payment, but you give up ownership or promise rewards. See how to find investors.

These can be the best answer for some businesses. They are simply not products ROI Funder offers.

How to choose: start with payback

Compare each option by total cost, payback period and monthly-equivalent payment, set against what the money will earn.

Here is an illustrative example. A retailer borrows $40,000 to stock for the holiday season and expects $30,000 of gross profit. Financing that costs $8,000 leaves $22,000. Another option costs $5,000 but arrives after the season starts and misses sales. The cheaper option can lose money because it is late.

ROI Funder works with a network of funders and matches each file to those that fit it. The range is $5,000 to $5,000,000. It considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Applying is online, takes a few minutes, uses a soft credit pull and carries no obligation to accept an offer. Not sure which fits? Read which funding fits your business.