Alternative Credit for Small Business

In my business credit practice I find that more and more clients are considering alternative credit for their small business before using business charge cards or business credit cards for funding.

Even though some argue the fact that business credit cards are much easier to obtain compared to loans and a business line of credit. I have to remind them that it comes with a hefty price tag. In addition if they rely heavily on credit cards they increase the chances of failure according to a study conducted by the Kauffman Foundation

For example, one of my new clients started a motorcycle repair business a year ago; he turned to credit cards for start-up money. Unfortunately, his business didn’t grow as fast as he hoped and today he is faced with over $25,000 in personal and business credit card debt. What’s even worse is one of his rates on his credit cards were increased from 9.9% to 14.9%!

Here are some alternative credit sources for business credit cards that I encourage you to consider:

Business charge cards

A business charge card is one of the options I make sure that every one of my clients takes advantage of. It’s one of my favorites because it’s a specific kind of card that has all the convenience of a credit card without the costly interest. The balance on a charge card account must be paid in full when the statement is received and can’t be rolled over from one billing cycle to the next like a credit card. Because you can’t carry a balance, a charge card doesn't have a periodic or annual percentage rate, so there is no rate for a charge card issuer to disclose. This prevents my clients from incurring any revolving debt saving them hundreds if not thousands of dollars in potential interest.

Peer-to-Peer Lending

This funding solution removes the traditional lending institutions from the equation and instead allows lending transactions to take place directly between individuals. If a client of mine doesn’t have a line of credit available but has a decent credit score and is seeking minimal capital then I suggest they check out Prosper.com and LendingClub.com. On these sites you can request up to $25,000 with a set period of time to pay back the loan at much lower rates than traditional lenders. Keep in mind that you will need to have a minimum FICO score of 660 in order to qualify.

Asset-based Financing

This is a funding option that I advise to clients who have an established business with collateral such as accounts receivable, inventory, equipment or real estate. When using this option, you put up assets to secure the financing but you still own your assets, but if you default, the lender can seize them.

Factoring

In some cases when my clients need funding quickly I suggest they consider factoring. This is a way for them to obtain capital without having to provide financial statements or a business plan.

With factoring, you sell your company's accounts receivables to a company (known as a factor) at a discount, in order to free up cash. The company purchasing the receivables then assumes the responsibility for collecting them. However, I always advise my clients to watch out for costly fees charged by most factoring companies.

It's important to be aware of these alternative funding options for your business and don't forget vendor credit as well. While traditional forms of business financing may seem difficult to obtain during these tough economic times it’s always best to diversify your funding sources rather than rely on business credit cards as a sole source for short term and long term funding.

You may contact Marco directly at: ceo@startbusinesscredit.com

Follow Marco on Twitter @MarcoCarbajo and read more of his insights on BusinessCreditBlogger.com