5 Financing Alternatives for Small Business


Funding Options You Should Consider Right Now

Running a small business can be a risky venture. Many small business owners borrow against personal assets to fund the cost of operating and growing their company. However, by doing so, the owners risk losing those assets, such as the family home, their retirement savings and more. There are other financing options business owners can consider besides heading to the bank for a loan, including selling its accounts receivable, selling company shares, taking on a silent partner, selling patents, and taking on joint venture projects. Bank managers tend to want security and proof of the business’ capacity to pay before loaning large sums of money. When you are starting a small business, proving the business will be profitable in the future can be difficult. This is why so many small business owners end up risking their own assets and property to secure a bank loan to fund the business. If the business goes bust, the bank can seize the property or assets to repay the business loan. You can look at unsecured loan options, but these generally have a higher rate of interest attached. If your small business does not have enough assets to secure a loan from the bank, it is often wise to consider other funding options and to limit the amount of unsecured money you borrow for the business.

1. Accounts Receivable Financing

Accounts receivable financing is a funding method in which a business uses its outstanding invoices as collateral for a cash advance. The business owner receives fast cash without jumping through the hoops associated with conventional financing options. Accounts receivable financing, also known as invoice factoring, offers several benefits to business owners, one of which is short-term capital to cover immediate expenses. Business owners often struggle to pay their bills during periods of fast growth. With accounts receivables financing, they can cover lease, utilities, payroll and more instead of making major sacrifices during cash flow gaps. Accounts receivable financing is also fast, allowing business owners to receive funds in just 24 to 48 hours. In comparison, it takes a minimum of 60 to 90 days to acquire a traditional bank loan.  

2. Company Shares

Sole traders own 100 percent of the business. Selling a share of the business can be a good way to finance the business. If you sell a share, you receive cash up front for the share, and pay the shareholder a dividend every quarter (usually an agreed percentage of the profits). To keep control over your small business, you should only sell a maximum of 49 percent of the business. Investors who buy shares expect a quarterly income from the investment and will often invest for the long-term. Sometimes, family, friends, or relatives will buy shares to help a small business owner get started. Always draw up a contract with the sale of any part of the business, explaining what the shareholder’s rights and responsibilities are for the business.

3. Silent Partner

A silent partner is an investor in your business. He or she finances the business, in return for shares or an agreed share of the profits of the business, but agrees not to interfere with any business decisions you will make. A silent partner will enter an agreement with a perceptive small business owner, who can effectively market the benefits of entering such a financial relationship.

4. Patents and Copyrights

Sometimes, the assets of a business include patents or copyrights, which are saleable assets. Depending on the nature of the business, selling patents or copyrights to larger firms may be enough to fund the start up of the business. This is only an option if you do not want the exclusive rights to manufacture the product to your specific design, or have another patent that has significant changes to the first. Inventors will often patent several versions of the same product. If you choose to manufacture only one of your patented products, you could sell one of the other patents to fund your business.

5. Joint Venture

A joint venture is a partnership between two or more businesses with mutually beneficial results. A small business owner who runs a dog washing service may join forces with a local pet food shop. Instead of paying rent for an entire shop space or paying for all the advertising costs, the dog washing service leases a small part of the car park of the pet food store. The pet food store may include the dog wash service in advertising, as a way of bringing more customers to the store. Both businesses may benefit from increased customers as the dog owners are more likely to buy the pet food when it is convenient to where they get their dogs washed.

The Bottom Line

If you are starting a small business, or need additional capital to fund an expansion for your small business, consider all the financial options available. You may find that there are better financial options for the long- and short-term than traditional bank loans.

About Universal Funding

Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.