For small business owners looking to grow and expand their operations, obtaining the necessary working capital can be a significant challenge, especially when traditional bank loans are out of reach. Fortunately, there are various alternative funding sources available that cater specifically to businesses in need of working capital. Here are six different working capital funding sources, their qualification requirements, ease of qualification, funding amounts, terms, costs, reliability, flexibility, speed of funding, and popular choices among small business owners.
- Invoice Factoring
- Merchant Cash Advance (MCA)
- Online Loan
- Angel Investor
Invoice factoring is a financial arrangement in which a business sells its outstanding invoices or accounts receivable to a third-party company, known as a factoring company or a factor. This provides the business with immediate cash flow, allowing them to access funds that are tied up in unpaid invoices. Invoice factoring is a popular form of short-term financing that helps businesses bridge the gap between completing a sale and receiving payment from their customers. It is designed for growing businesses that need their cashflow to keep up with their sales.
- Qualification Requirements: Invoice factoring is particularly suitable for businesses with outstanding invoices from creditworthy clients.
- Ease of Qualification: Relatively easy for businesses with solid accounts receivable.
- Funding Amount: Typically ranges from 80% to 90% of the invoice value.
- Term: Depends on credit terms, can replenish when invoice is paid.
- Cost: Factoring fees can range from 1% to 4% of the invoice amount.
- Reliability: Very reliable if dealing with a reputable factoring company.
- Flexibility: Flexible, as funding increases with the value of invoices.
- Speed of Funding: Quick, usually within a few days.
A Merchant Cash Advance (MCA) is a type of financing option that allows businesses to receive a lump sum of cash in exchange for a portion of their future credit card sales or daily bank deposits. It is a form of alternative financing that is especially appealing to businesses with consistent credit card sales but may not have access to traditional loans due to factors such as limited credit history or lower credit scores. It’s important to note that Merchant Cash Advances typically come with higher costs compared to traditional loans. While MCAs can provide quick access to capital, businesses should carefully evaluate their ability to manage the associated costs before opting for this financing route.
- Qualification Requirements: Businesses with consistent credit card sales.
- Ease of Qualification: Relatively easy, as approval is based on credit card sales history.
- Funding Amount: Typically up to 125% of the average monthly credit card sales.
- Term: Short-term, often repaid daily or weekly.
- Cost: Can be very expensive.
- Reliability: Reliable if sales remain consistent, repayment frequency and amount can be a challenge.
- Flexibility: Flexible repayment linked to sales volume.
- Speed of Funding: Quick, often within a week.
An online business loan is a type of financing that allows businesses to apply for and secure a loan through an online platform or lender. This form of lending has become increasingly popular due to its convenience, speed, and accessibility, especially for small businesses that may not qualify for traditional bank loans or are looking for quicker funding options. Online loans are, however, associated with higher costs than traditional bank loans.
- Qualification Requirements: Businesses with a decent credit score and consistent revenue.
- Ease of Qualification: Moderately easy, with less stringent requirements than banks.
- Funding Amount: Varies widely, from a few thousand dollars to several hundred thousand dollars.
- Term: Short to medium-term loans, usually up to 5 years.
- Cost: Interest rates and fees vary; APR can range from 10% to 50%.
- Reliability: Reliable if dealing with reputable online lenders.
- Flexibility: Offers various loan types and repayment schedules.
- Speed of Funding: Quick, often within a week.
Business crowdfunding is a financing method in which a business raises funds from a large number of people, typically through an online platform, to support a specific project, initiative, or the overall operations of the company. Crowdfunding provides businesses with an alternative way to secure capital by tapping into the collective contributions of individuals, often referred to as “backers” or “contributors,” who believe in the business’s mission or product. While the funds can be low cost or free, crowdfunding is typically an unreliable source of long term working capital.
- Qualification Requirements: Depends on the crowdfunding platform and campaign strategy.
- Ease of Qualification: Difficult for larger funding amounts.
- Funding Amount: Can range from a few thousand dollars to over a million dollars.
- Term: No fixed repayment terms, but contributors usually receive rewards or equity.
- Cost: Platform fees (5% to 10%) and rewards for backers.
- Reliability: Unreliable.
- Flexibility: Flexible, as campaigns can be customized.
- Speed of Funding: Variable to low, depending on campaign success.
A microloan is a small loan typically offered by nonprofit organizations, community development financial institutions (CDFIs), online lenders, and sometimes traditional banks to support small businesses, startups, and entrepreneurs. Microloans are designed to provide relatively small amounts of capital, often ranging from a few hundred dollars to $50,000, to businesses that may not qualify for larger loans from traditional financial institutions. A microloan can be an effective source of working capital, although it is not a large or long-term source of working capital.
- Qualification Requirements: Startups and small businesses with limited credit history.
- Ease of Qualification: Relatively easy, with less strict credit requirements.
- Funding Amount: Up to $50,000, depending on the lender.
- Term: Short to medium-term, usually up to 5 years.
- Cost: Interest rates can range from 8% to 20%.
- Reliability: Reliable when working with reputable microlenders.
- Flexibility: Offers structured repayment plans.
- Speed of Funding: Quick, often within a few weeks.
A business angel investor, often simply referred to as an “angel investor” or “angel,” is an individual who provides capital to early-stage startups or small businesses in exchange for ownership equity or convertible debt. Angel investors are typically high-net-worth individuals who use their personal funds to invest in businesses they find promising or aligned with their interests. Apart from financial support, angel investors may also contribute their expertise, industry knowledge, and networks to help the business grow and succeed. This is typically outside the reach of most small business owners and an exchange of equity is not always the easiest decision to make when it comes to working capital financing.
- Qualification Requirements: Businesses with high growth potential and a compelling business plan.
- Ease of Qualification: Moderately difficult, as businesses need to attract investor interest.
- Funding Amount: Can vary widely, from a few thousand dollars to millions.
- Term: Depends on investor agreement, often with an exit strategy in mind.
- Cost: Typically involves giving up equity in the business.
- Reliability: Unreliable.
- Flexibility: Depends on investor preferences and terms.
- Speed of Funding: Can take time to find and negotiate with investors.
Popular Alternative Working Capital Funding Choices
Among the various working capital funding sources, invoice factoring, online business lenders, and merchant cash advances tend to be popular choices due to their accessibility, speed, and flexibility. However, each option comes with its own set of pros and cons, and the suitability depends on the specific needs and circumstances of the business. It’s essential for small business owners to thoroughly research and compare these options before making a decision.
In conclusion, securing working capital for a growing business or one that doesn’t qualify for a traditional bank loan is possible through a range of alternative funding sources. By understanding the qualification requirements, ease of qualification, funding amounts, terms, costs, reliability, flexibility, and speed of funding for each option, business owners can make informed decisions that align with their growth strategies and financial goals.