Business Financing For Operating Businesses

business financing

Business financing is often acquired from your local banker or commercial lender.  

Times have changed. Banks are still a primary source of business funding but qualifying for a loan has gotten a lot tougher since the Great Recession. The tighter restrictions on bank loans have caused a surge in alternative business funding.  Business-Money-Source will assist you in acquiring the business money are seeking.

There are several common types of business financing that you will utilize during the evolution of your business from start-up financing to expansions and acquisitions. Here you will find a brief description of those types of business money.


Business Financing: Asset Based Lending

In the broad sense, asset based lending is any type of business financing where some of value (an asset) is pledge as security for the repayment of a loan. A default by the borrower will result in the asset being forfeited by the lender as settlement for the debt. Lenders may offer asset based lending programs for accounts receivables, equipment, inventory and real estate. Some lenders specialize in one or more type of assets. Almost anything of value may be used as collateral for business financing if the asset is acceptable to the lender. More On Asset Based Lending?


Accounts Receivable Financing and Factoring 

Accounts receivable financing and factoring are two vehicles of business financing that existing businesses can use. It is easy to get the two types confused because they are similar in that both financing methods uses the money owed to your company.

In accounts receivable financing you use the money owed to your business as collateral for the loan. For example: you own a hardware store and sell to plumbing contractors. Your monthly invoices from those contractors average $700,000 per month. A lender may lend you 70 or 80% of your receivable value. Say she lends you 70%, which would be $490,000. “Great! But where is my other $210,000?” You ask. You will receive that amount when your customers pay your account. Wait, you don’t get to keep the entire $210,000. You have to pay the lender what is known as a “discount rate” for the use of her money. For this example, let’s say the discount rate is 5%. 5% of $700,000 is $35,000. Let’s see how this worked out for you. You received the $490,000 from the AR lender and you received the balance when your customers paid their bills less the 5% discount rate. You received a total of $665,000 of the $700,000 owed you. The $35,000 was your cost to have the $490,000 upfront without having to wait for it. There will be times when this type of transaction will make sense and there will be times when you can afford to wait for your receivables to be paid off.

There is a variation of the AR type of business financing that can be done using credit card receivables with merchants who have a specific minimum of credit card sales each month. This is called a merchant cash advance or credit card cash advance. You will learn more about this type of business money on this website under Merchant Accounts.

More on accounts receivable financing?

Factoring is a financing method similar to AR financing with one important difference: When receivables are factored the factor actually buys the debt (receivables) owed by your customers from you at a discount. The amount of the discount varies from industry to industry and business to business.

There are two types of factoring agreements, “With Recourse” and “Without Recourse”. With recourse means that you the seller of your receivables can still be held liable if the factor cannot collect her from some of your creditors. Without recourse means that once the transaction closes, you are no longer liable to the factor for any uncollectible receivables.


Both methods, AR financing and factoring are utilitized in the healthcare industry to fund medical receivables.


Hard Money Business Loans

Hard money loans are a means of temporary financing while you are seeking more permanent funding. The difficult part of acquiring a hard money business loan maybe finding a You should do due diligence before entering any financial transaction. This is especially true when seeking hard money private lender. You need to be positive that you are dealing with a reputable lender. Also be prepared to a pay high interest rate for hard money. This type of business money is most often used for acquisition or construction. Therefore the most common use for hard money financing is in commercial real estate.


Unsecured Business Loans

There are unsecured loans, both business and personal, that may be available to you depending upon your credit rating and financial situation. Again, this is a type of loan that you want to complete due diligence before proceeding. The obvious advantage of an unsecured loan is that your business assets are not pledged as collateral. The increase risk to the lender will also make this type of loan more expensive.


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More On Factoring?

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Business Financing For Starting Your Business

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