One of the most frequent worries for business owners is the ability to make enough revenue to meet their business expenses. While healthy revenue is a vital part of a successful business, there are times when a business just won’t make enough. One option for business owners that need capital is to apply for a business bank loan. However, most banks require a good credit score and do not work with businesses that are less than two years old.

Fortunately, there is an alternative to banks with private lending. Most private lenders are more flexible than banks and offer more creative funding solutions for businesses. The following are some of the financing programs that are provided by many private lenders.

1. Contract Monetization

Contract Monetization is a financial arrangement in which a contract buying firm provides upfront funds to a business owner for a business contract. Contracts usually include specific duties that will be performed by the business owner in the future. It also includes specific payments that are due the business owner once the duties have been completed. Most contract buyers offer up to 90% of the value of a business contract.

What type of business is Contract Monetization right for?

Contract Monetization can benefit any company that works with contracts. This type of financing works for many industries, including:

  • Construction
  • Energy
  • Water
  • Oil and Gas
  • Transportation
  • Technology

Note that this type of funding would not work with businesses that need ongoing service maintenance.

How does Contract Monetization work?

1. The first step to contract monetization is determining whether or not you need it. If you have a contract to fulfill and you do not have enough upfront capital to execute your contract, then it may be necessary to apply for Contract Monetization.

2. If you’ve determined that you need Contract Monetization, the next step is to find a contract buyer. When considering contracts to purchase, contract buyers usually perform due diligence by reviewing the business’s history, its owners, the business owner’s experience with fulfilling contracts, and the creditworthiness of the contract’s end customer.

3. If the buyer agrees to purchase the contract and the end customer agrees to work directly with the buyer, the buyer then pay the business owner a percentage of the approved amount upfront. The business owner would then receive the remaining balance of that payment (minus the buyer’s fee) when they complete the required task in the contract.

Note: Many contract buyers offer to purchase up to 90% of a business contract’s value. Typically, contract buyers provide only a portion of the funded amount upfront. The remaining balance is paid after the task in the contract has been fulfilled.

Here is an example: An auto parts manufacturer has a $100,000 contract to produce tires for their end buyer. The buyer agrees to pay 90% of the contract’s value ($100,000). The buyer may pay the company $50,000 upfront and the remaining $40,000 (minus the financing company’s fee) when the auto company produces the tires, as required in the contract.

Advantages and Disadvantages of Contract Monetization

Advantages

  • Newer companies and start-ups can qualify for this type of funding compared to bank loans
  • A company owner’s credit score is not a deciding factor for funding approval
  • A business owner has the ability to fulfill larger contracts they may otherwise miss out on

Disadvantages

A business owner’s end customer may not be willing to work with a contract buyer. Instead, the customer may wish to work directly with the business owner that they have the contract with.

2. Purchase Order Financing

If you own a business that utilizes purchase orders on a regular basis, Purchase Order Financing (PO Financing) may be a good funding option for you. PO Financing is an advance from a lending company that pays your suppliers for goods you’re reselling or distributing to a customer.

Purchase order financing can help your company fulfill product orders. It allows you to finance payments to your suppliers for manufacturing and transportation costs before you receive payment from your customers. You can finance up to 100% of the purchase order costs and typical rates range from 1.15 and 6% of the amount advanced.

What type of business is Purchase Order Financing right for?

Purchase order funding works best with companies that resell finished goods to their customers. This includes wholesalers, distributors, manufacturers, importers and exporters. PO Financing is best for businesses that experience seasonal sales spikes. PO Funding can help companies meet the needs of your customers without tapping into working capital.

PO funding is also useful for companies that experience exponential growth.

PO financing will not work for companies that resell or distribute unfinished goods.

How does it work?

Once you have a purchase order from your customer and a quote from your supplier, you can apply for funding with a lender. With P.O. financing, the lender typically pays a supplier and directly collects the payment from your customer.

Below is what a typical P.O. Financing transaction would look like:

1. Business owner receives a customer purchase order

2. The Business Owner receives a quote or cost estimate from their supplier.

3. The Business Owner applies for funding by providing a copy of the customer purchase order and quote from their supplier.

4. If the Business Owner is approved, the lender proceeds by paying the supplier to produce and ship the goods needed to fulfill the customer order. Lenders typically pay suppliers in the form of a letter of credit.

5. After receiving payment from the lender, the supplier delivers the goods either directly to the customer or to the Business Owner’s location.

6. The Business Owner invoices their customer and extends the terms to the customer.

7. The customer directly pays the P.O. lender the full amount on the invoice.

8. After deducting their fees, the P.O. lender then pays the Business Owner the remaining balance of the funds that were paid by the customer.

Advantages and Disadvantages of Purchase Order Financing

Purchase order financing can be a good tool for businesses that are in need of capital. However, this type of financing does not work for all businesses. Here are some of the benefits and drawbacks of Purchase Order Financing.

Advantages

  • PO financing is a good funding option for businesses that experience seasonal spikes, frequent cash flow shortages and/or exponential growth
  • Can reduce the upfront costs of buying inventory
  • Reduces upfront costs during peak seasons
  • Helps businesses pay for transportation and shipping costs
  • By receiving an upfront payment on a contract, a business owner can get access to working capital quickly without waiting on a customer’s payment(s)

Disadvantages

  • The funds that are provided by P.O. financing can only be used to pay a supplier. It cannot be used for typical business expenses, such as payroll or rent.
  • P.O. Financing only works if a company’s goods have a high profit margin. P.O. lenders have their own threshold but the typical minimum profit margin that is required varies from 25% to 30%.
  • If a company applies for P.O. Financing, they must ensure that their supplier accepts letters of credit. A letter of credit is the usual way that P.O. lenders fund a P.O. financing request. This is because the lender wants to be sure that the supplier delivers the goods before they are paid.
  • P.O. lenders typically work directly with a company’s end customer. Because of this, a company runs the risk of losing that customer since many customers would rather work directly with someone that they already have a relationship with. The business’s buyer may also assume that the company isn’t financially sound to stay in business with.

3. Merchant Cash Advances

A Merchant Cash Advance is a funding product for businesses that accept credit card payments as part of their business. A Merchant Cash Advance lender advances funds to a company in exchange for a percentage of that company’s future credit card receipts. The amount advanced is based on the total amount of credit card receipts you have per month.

What type of business is a Merchant Cash Advance right for?

Since Merchant Cash Advances are more expensive than other types of business financing, it should only be used as a last resort.

A Merchant Cash Advance would beneficial for a company that needs fast funding but cannot qualify for any other type of financing. Another scenario where an MCA would work is if a business has a seasonal spike but lacks the capital to fulfill customer demand.

How does it work?

The first step to MCA financing is to apply with a lender that offers this program. If you’re approved, the lender provides a term sheet that outlines the factor rate and hold back percentage. If you agree to their terms, the lender funds the business by wiring the money to the business owner’s corporate account. The lender then collects the hold back percentage daily until the advanced amount is repaid.

Advantages and Disadvantages of a Merchant Cash Advance

As with all types of business funding, a Merchant Cash Advance has its advantages and disadvantages.

Advantages

  • A business owner can get access to working capital quickly
  • An MCA can help a company fulfill an unexpected spike in customer demand
  • Most MCA lenders fund business owners with “less than perfect” credit
  • Newer companies (2 years or less) can qualify for an MCA, compared to other types of loans that do not fund new companies

Disadvantages

  • An MCA is expensive compared to other business funding options
  • If a business owner uses an MCA to pay off another MCA account, the business owner runs the risk of going in circles and go further into debt. This is because the new loan can cost more than the loan that’s being paid off.

4. Accounts Receivable Financing

Accounts Receivable Financing (AR Financing) is a financial arrangement in which a business either sells or obtains a loan against their unpaid accounts receivables. If your business has outstanding invoices or slow-paying customers, this funding option may work well. AR financing is an effective way to get access to working capital without waiting for your customers to pay you.

AR Financing can be structured in 2 ways: as an asset sale or a loan. In an asset sale structure, a business owner sells their unpaid accounts receivables in exchange for receiving a percentage of the value of the invoice(s). Most AR buyers offer up to 90% of the value of an account receivable.

With an AR loan, a lender provides a loan against the value of the accounts receivable. Many lenders offer up to 95% of the value of an accounts receivable. These types of loans are typically short term and have various rates that start at 1.15% per 30 days. Rates can be prorated for shorter or longer periods of time.

How does it work?

AR buyers and lenders have their own process for purchasing or loaning against accounts receivables, but most basically follow this process:

1. Due Diligence + Accounts Set-Up

Whether you work with an AR buyer or lender, the usual first step for both is to perform due diligence on the account receivable(s). During this process, the lender or buyer typically review the accounts receivables, the business owner(s), history of the selling company, history and creditworthiness of the end buyer(s), and verification of the terms of the account receivable(s).

2. Prepare Your Accounts Receivables

After an account is set up, the business then chooses which invoice they’d like to fund or sell. Invoices are usually submitted with a schedule of accounts.

3. Verification

After the account receivables are submitted, the AR lender or buyer verifies the invoices with the end customer. The lender also verifies the term of the invoice. Most lenders reject account receivables that do not have 30 or 60-day terms.

4. Financing

After the AR lender verifies the receivables, the lender sends the funds to the company. The funding amount is the percentage of the invoice that the lender agrees to pay to the company.

5. Payments and Settlement

After the receivables are funded, the end customer makes their regular payments to the lending company. Most lenders and buyers provide collection services, allowing a business’s end customer to make payments directly.

6. Ongoing process


Many account receivable financiers allow companies to sell or obtain a loan against account receivables as often as they’d like. This is assuming that a company’s end customer pay on time and there are no issues.

Advantages & Disadvantages

When used properly, Account Receivables Financing can work for new and existing companies seeking capital. Regardless, it may not work for all companies. There are some advantages and disadvantages to consider, such as:

Advantages

  • You can get funding for your business without giving up equity
  • Can be used to pay for business expenses, such as rent, office supplies and marketing
  • A business owner can eliminate the need for collecting payments from their customers since Accounts Receivables lenders typically collect the payments on a business owner’s Accounts Receivables

Disadvantages of AR Financing

  • When structured as a loan, AR Financing can be a more expensive option than other types of business loans
  • Most Accounts Receivable buyers pay up to 90% of an accounts receivables’s value. This may be an issue for business owners that prefer 100% of their accounts receivable to be paid.

5. Joint Venture Financing

Joint Venture Financing (JV Financing) is an arrangement in which one party (a financier) provides funding to a company in exchange for a portion of the company’s revenues. Some financiers may agree to pay a portion of expenses as well. Most joint venture arrangements are short term, typically between one to five years.

What type of businesses is Joint Venture Financing good for?

JV Financing works best for business people that are open to having a partner in their company as well as splitting their profits.

It is most beneficial to those that would like to finance their companies without going into debt. JV Financing works well with many types of businesses, such as:

  • Real estate development businesses
  • Restaurants and food companies
  • Technology businesses
  • Manufacturing businesses
  • Import/export businesses
  • Wholesale businesses

How does Joint Venture Financing work?

Most JV financiers have their own processes that are tailor made for each transaction they fund. This makes it almost impossible to establish a set process. However, one of the most important components of JV financing is negotiating the terms and conditions of the joint venture agreement. It’s important to hire a corporate attorney to draw up your jv contract once you and your JV financier have come to an agreement.

Advantages and Disadvantages of Joint Venture Financing

Advantages

  • A business can get funded without going into debt
  • A JV Financier may have experience in your industry and as a result, add value to your company
  • With JV Financing, can give companies the funds to pursue opportunities they would otherwise not have the ability to
  • Unlike conventional business loans, many JV Financiers work with business owners that have bad or insufficient credit

Disadvantages

  • Potential of culture clash between companies
  • Risk of legal and/or ethic disputes
  • Risk of the joint venture failing
  • Risk of financial losses

Conclusion

There are many funding options for businesses to choose from. When deciding on what type of funding to use, it’s best for the business owner(s) to consider the purpose of the funding. Business owners should also keep in mind the financing costs, requirements and qualifications of the funding options.