For fledgling entrepreneurs or business owners who lack perfect credit, assets or other basic requirements needed for a bank loan, there are alternative options for raising needed capital. Equity financing like angel and venture capital investing is one choice — but for those who don’t want to give up partial control of their company, it may not be the best solution. Insider financing is often the first one offered as a tip for startups — insiders being friends, family and other close people. While that may work for the fortunate few who have wealthy relatives, it family relationships are important, risking them should the enterprise fail may not be worth it.

That still leaves some options, like factoring, leasing various equipment, bartering, pursuing private lenders that work with higher-risk businesses, and the more personal possibilities like borrowing against so-called whole life insurance, getting a home-equity loan or the old standby, the credit card. Some of these, like bartering or leasing, will not generate money per se, but they will help alleviate the pressures of cash flow.

Factoring, a term that basically means selling accounts receivables, has grown in popularity with businesses that need short-term solutions. It’s less expensive than venture capital and it doesn’t give out any control, and a good solution “for businesses growing too fast or are brand new and can’t get money any other way,” said Tom Riggs with First Commercial Finance (www.firstcomfin.com), a company that specializes in factoring.

“Factoring is very much like a credit card,” Riggs said. “It’s a cash management tool.” Only the transaction usually involves much more money. The factor will give a loan based on an invoice, and in some cases even against a purchase order (but with higher fees). That means the company that owes you money must be reputable and its track record will play into the loan decision, along with your own situation.

Manufacturing companies and others dealing in goods may benefit the most from factoring, though company with any large accounts receivable could be used. Riggs said anyone not making at least a 20 percent profit margin should avoid factoring, with 40 percent being ideal — and the sooner the invoice is paid by the third party, the less the business will incur in costs. Often, factoring is calculated in 10-day increments: for example, a $50,000 loan may only cost $500, but by the end of the month the fee will be closer to $2,000. So factoring is really not a long-term opportunity.

If the business needs money mostly to buy equipment, furniture, or inventory, a loan may not be needed. Many companies now lease equipment, from computers to copiers and even furniture. Others will finance inventory purchases, sort of like in-house credit. If a credit card is an option, a little research would be in order to see which financing method is the least expensive. Companies that offer in-house financing also limit the amount of credit given to customers.

Locally, businesses that have failed to obtain bank or Small Business Administration-backed loans have another option: Cascadia Revolving Fund (www.cascadiafund.org), a nonprofit agency that helps Pacific Northwest businesses, and also has special programs for child-care facilities, nonprofits, rural enterprises and businesses employing low-income people. Cascadia offers one more invaluable advantage: technical assistance and business counseling.

“The idea is to work with entrepreneurs who traditionally have not been able to have access to capital and conventional loans,” said Tina Vlasaty, business lender with Cascadia. “Technical assistance and consulting is an integral part of our work because we’re dealing with fragile businesses.”

Cascadia, which closed 26 loans worth more than $3 million in Washington State and helped retain or create 286 jobs, will look at various strengths, including industry experience, collateral, contracts, and operating history (six to 12 months operating history is needed).
  Whatever alternatives a business owner may pursue, chances are the costs will be higher that traditional borrowing, so unless that wealthy relative idea is still feasible, it’s best to explore all the choices, starting with bank loans.