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Alternative Small Business Financing Strategies

Did you know that over 85% of small businesses start and grow without outside financing?

Unfortunately, however, longer term success is often subject to risk simply because of a lack of financial management training and knowledge, along with a lack of understanding about how to effectively utilize financial resources.

Small Business Working Capital Learning Topics:

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Financial Management: Knowledge is Power

Success in business is about having a solid grasp of the numbers. This does not mean having to become a trained CPA, but it does mean knowing what your options are when you need working capital to finance growth. This is particularly true during tough economic times when banks make it difficult to tap credit lines and access longer term financing. Under these conditions, it pays to know about the following financing alternatives;

  1. Supplier Credit refers to the payment terms your vendors and suppliers offer you as their customers. The stronger your business credit history, as well as how important you are to your suppliers, the more negotiating power you have for buying now and paying later. The longer you stave off paying, the more you can use cash flow for other uses in the meantime. You may also have the option to improve profitability by negotiating for a discount if you choose to pay the invoice earlier than the due date.
  2. Factoring is a form of business financing where invoices are sold at a discount to a third party (a factor) before they are due. Examples of factoring include;
    1. Spot Invoice Factoring is when your business submits one (1) invoice to a finance company to borrow against. While this may improve short term cash flow needs, it can be more expensive than other options – 5% to 8%.
    2. Full-Service Factoring is when you need to build working capital over time. In this situation, you assign the management of your accounts receivable over to the factoring company who then handles the invoice processing and even the collection process when you need assistance. Discount fees charged for this service are roughly 1% to 3%.
    3. Geographic Specialization Factoring refers to financing solutions that target specific trade regions. For example, as trade increases between China and the U.S., 1st PMFBancorp offers factoring invoice solutions and trade finance solutions, as well as credit insurance, credit reporting and other credit services.
  3. Accounts Receivable (A/R) Financing is when you submit invoices to an Accounts Receivable (A/R) financing company or bank that provides a formula borrowing base that is set to your eligible accounts receivable. The amount you can then borrow from them is calculated daily and an interest rate is applied on the monies you borrow.
  4. Purchase Order (P/O) Financing comes in handy when your business has a valid purchase order from a financially solid customer, but you lack the funds to fill the order. With a track record for filling similar orders, you can work with a P/O financing company to secure advanced funds against the total purchase order value.
  5. Asset-Based Lending refers to using all of your business assets to secure lending, such as Accounts Receivable (A/R), real estate and inventory. Under this arrangement, your objective is to secure a larger amount of working capital and typically for a longer term.

Simply put, business assets can be managed to improve cash flow and finance growth. This includes managing business credit, leveraging accounts receivable and leveraging business collateral in the form of factoring invoices. The key is to know what your options are, who to ask, who to trust and how to align the right solution for your particular business needs.

Did you know?

"...that 1st PMFBancorp® has been specializing in providing businesses with short-term working capital solutions for over 25 years? Family owned and operated, PMF direct lending services include Invoice Factoring (domestic & foreign), Accounts Receivable Lines, Trade Finance, Asset Base Lines, Equipment Financing and Leasing and other customized working capital solutions that traditional banks are typically unable to provide."

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Other Small Business Working Capital Learning Topics:
Working Capital Know-How | Factoring | Alternative Financing | Increasing Cash Flow | Special Finance Services

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Note: This information has been compiled by the Knowledge Institute for Small Business Development (KISBD) for educational purposes only in order to convey a general overview of the options and related services available to small businesses in the subject areas introduced. Content is provided on an "as is" basis and is not intended to be an exhaustive representation, nor does it provide advice or create a customer relationship between KISBD and its sponsors,, its affiliates and any other organization named herein, and any reader.

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