Five Alternative Financing Options

Getting new business often means needing new financing, which can be difficult now that balance sheets have been roughed up over the past several years. For such companies, it may be difficult to secure bank loans, lines of credit, and even Small Business Administration loans. Yet there are alternative financing options, even if they are a little more costly.

1. Asset-based lending. These loans, often in the form of lines of credit, are based on a percentage of the value of a company’s assets, including inventory and accounts receivable.

2. Factoring. This financing alternative allows businesses to borrow against outstanding invoices. In a sense, a company sells its accounts receivable at a slight discount.

3. Hedge funds and private-equity funds. A growing number of funds, flush with cash, are lending to midsized businesses, but often charge relatively high interest rates.

4. Your 401(k). Although somewhat complicated, business owners can tap their retirement account for up to $50,000, or 50 percent of the value of the retirement account. You’ll need the help of a financial planner or retirement-plan administrator to do this.

5. Vendors and suppliers. Not all vendors or suppliers will be interested or in a position to help, but these companies have a stake in your success. The right ones may be interested in providing financing to good customers.

This article was written by Scott Rutter and published in Bloomberg Businessweek magazine.