5 Signs It’s Time To Seek Alternative Business Financing Options

One important component of managing the operations of a business involves conducting financial analysis.

When you conduct this analysis, there are 5 important red flags you need to be aware of. These red flags can indicate that it is beneficial for the company to seek out alternative business financing options instead of relying on conventional business loans through the banking sector. Consider the following signs that an alternative funding option is likely to be preferable.

1. The Company’s Customers Are Slow To Pay

Slow-paying customers are a reality for many businesses. A situation involving multiple slow-paying customers can cripple a company’s cash flow, making it a challenge to accomplish the organisation’s operational goals. Yet this situation is the norm in some sectors of the economy. For example, if you’re working with a manufacturer, distributor or other B2B company that sells to major retailers, it would be typical for the retailers to request payment terms. Depending on the retailer, they might take as long as 180 days to render payment for goods that were delivered.

In cases like these, one option stands out as being substantially better than financing through a conventional bank loan: This option is known as invoice factoring. Factoring empowers your business to leverage your outstanding invoices to get your hands on working capital upfront. Since you’re essentially selling your company’s outstanding invoices, this method will not result in outstanding debts that later need to be paid off.

This method of alternative financing is commonly used by garment manufacturers who need to pay for fabrics and other supplies before they can produce the clothing they will sell to retailers.

2. The Company Is A Startup

Banks have a long list of strict requirements that a business must meet before qualifying for a loan. These requirements can be a challenge for some businesses, especially startups, to comply with. If the company is less than 2 years old, it’s almost a given that they’ll be rejected for a conventional bank loan. In that case, it will likely be preferable to seek out a solution from an alternative lender.

Some alternative options that could potentially be available to businesses include lines of credit, business term loans, equipment loans, merchant cash advances, business credit cards, nonbank mortgage loans, peer-to-peer loans, invoice factoring and invoice financing.

3. The Applicant’s Credit Rating Is Below 640

Bad credit disqualifies many businesses from receiving funding from conventional banks. However, there are some lenders in the alternative space that are willing to assume the risks of lending to businesses with bad credit. Furthermore, as mentioned above, as long as your business is selling goods directly to other credit-worthy businesses, you may be able to find a company willing to front cash for your outstanding invoices.

4. The Company Has Recently Restructured Due To Bankruptcy Proceedings

Majority of conventional lenders will not agree to provide funding for companies that have recently restructured due to bankruptcy. It can be challenging for companies in this situation to obtain funding from any source; but in this case, alternative funding options are far likelier to be viable than conventional sources.

5. The Company Only Needs To Borrow A Small Amount of Funds

Historically, banks have been reluctant to issue loans for sums of money less than about $200,000. If your business needs to raise a sum that’s less than this amount, you will most likely have to find a source of funding outside the conventional banking system. This is because banks are typically looking to make sizeable profits on the loans they give; loans for amounts below $200,000 tend to result in lower profit margins than they hope to achieve.

These are 5 of the most common red flags that your business would be unlikely to succeed with securing funding through the conventional banking system. Be on the lookout for these signs when assessing your business. If you uncover any of them, the next step is to determine whether your company already has enough working capital available to meet payroll and cover all other operating expenses.

If there is not already enough working capital on hand to cover expenses, you’ll automatically know that you need to make it a high priority to guide the other stakeholders in the company towards viable sources of alternative funding. Your logical next step would be to research alternative funding sources so you can make solid recommendations on how your company should proceed with securing the funding you need for conducting business operations. When you evaluate potential lenders, such as AdvancePoint Capital for example, check that they offer invoice factoring, business term loans, lines of credit, business credit cards and other workable options that are practical for your business.