Businesses across the country rely on loans from banks nearly every day for a variety of reasons, from helping cover operating expenses to expanding facilities. But, this type of financing isn't available to everyone, as small- and medium-sized businesses can often be turned away by banks due to lagging cash flow, limited available capital or a poor credit score.
So, what happens when one of these smaller firms needs financing? One consideration is alternative financing, and businesses have a couple beneficial products to choose from.
Alternative product No. 1 – Inventory financing
Small retailers and wholesalers can take advantage of inventory financing. Both of these types of businesses rely on having a full stock of product to complete sales and fill orders, but, sometimes, that stock runs low. With the inability to obtain a loan from a bank to purchase additional product, retailers and wholesalers can use inventory financing. This form of asset-based lending allows a company to use current inventory as collateral to obtain a revolving line of credit, which, in turn, can be utilized for many different things.
One of the major benefits of this form of asset-based lending is that it allows retailers and wholesalers to keep their stock full. For example, if a retailer is unable to have product on their shelves, it would be difficult to complete sales and make money, and this type of financing ensures shelves will never be empty.
Inventory financing can also help businesses out during periods of lagging cash flow. Seasonal lulls occur in the retail industry multiple times throughout the year, and with this type of financing, businesses are able to cover operating costs and keep their doors open without high sales levels.
Alternative product No. 2 – Purchase order financing
Manufacturers and wholesalers are two types of companies that are able to benefit from purchase order financing. These businesses rely on being able to fill orders to make money, but if they receive one that is larger than they usually handle, it can be difficult to finance. Luckily, purchase order financing is able to provide smaller manufacturers and wholesalers with up to 100 percent of the funds needed to fill an order.
Through this type of financing, smaller businesses are able to take advantage of potential game-changing orders from big-box retailers such as Target or Walmart, which could provide great opportunities for growth. Another major benefit of purchase order financing is that owners of these companies aren't forced to sell equity to obtain funds to fill an order, allowing them to retain 100 percent ownership and still be able to sell product to a large retailer.
Alternative forms of financing are essential to the health of small business in the United States, and without these options, fewer of these operations would likely be able to stay open as it would be too difficult to finance things on their own dime.