Alternative Financing Options for Business Expansion

Sara Blakely Image from Wikimedia Commons, CC BY 2.0

"Don't be afraid to get creative about how you finance your business. Sometimes the most unconventional path leads to the greatest success."

Sara Blakely

Sara Blakely built Spanx into a billion-dollar company without taking on any outside investment or traditional business loans. She started with $5,000 of her personal savings and grew the company through bootstrapping and reinvesting profits. Her approach demonstrates that creative financing strategies can lead to remarkable business success.

Beyond Traditional Loans: Alternative Financing Options

While traditional bank loans, SBA loans, and lines of credit are common financing options for business expansion, they're not the only paths available. Alternative financing methods can provide capital when conventional options aren't accessible or don't align with your business model. These options often have more flexible requirements, faster funding timelines, or specialized structures designed for specific business needs.

Equipment Financing

Equipment financing allows you to purchase equipment needed for expansion while using the equipment itself as collateral.

Best for: Businesses that need to purchase specific equipment as part of their expansion.

Advantages:

  • Equipment serves as collateral, making approval easier
  • Preserves cash flow and other credit lines
  • Potential tax benefits (Section 179 deductions)
  • Fixed payment schedule for easier budgeting
  • Faster approval than traditional loans (often 2-5 days)

Challenges:

  • Limited to equipment purchases only
  • Higher interest rates than traditional loans (8-30%)
  • May require down payment (10-20% typically)
  • Risk of owning outdated equipment at the end of the term

Typical terms: 1-5 years, with financing available for 80-100% of equipment value

Invoice Factoring/Financing

Invoice factoring allows you to sell your unpaid invoices to a factoring company at a discount in exchange for immediate cash. Invoice financing uses your invoices as collateral for a loan or line of credit.

Best for: B2B businesses with outstanding invoices that need immediate cash flow during expansion.

Advantages:

  • Immediate cash flow (often within 24-48 hours)
  • Approval based on customers' credit, not yours
  • No debt added to your balance sheet (with factoring)
  • Scales with your business growth
  • No collateral beyond the invoices required

Challenges:

  • Higher cost than traditional financing (discount rates of 1-5% per month)
  • Factoring company may contact your customers
  • Potential negative perception from customers
  • Only works for businesses with invoices

Typical terms: Advance rates of 70-90% of invoice value, with the remainder (minus fees) paid when customer pays

Merchant Cash Advances

A merchant cash advance provides a lump sum payment in exchange for a portion of your future credit card sales or a fixed daily/weekly payment.

Best for: Retail or service businesses with high credit card sales volumes that need quick capital for expansion.

Advantages:

  • Very fast funding (often 1-3 business days)
  • Easy qualification (primarily based on sales volume)
  • No fixed payment amount with percentage-based repayment
  • No collateral required
  • Poor credit may be acceptable

Challenges:

  • Extremely high cost (factor rates of 1.1-1.5, equivalent to 20-150% APR)
  • Daily or weekly repayment can strain cash flow
  • No benefit to early repayment
  • Potential debt cycle risk

Typical terms: Repayment periods of 3-18 months, with factor rates rather than interest rates

Crowdfunding

Crowdfunding raises small amounts of money from a large number of people, typically via online platforms.

Best for: Businesses with compelling stories, innovative products, or strong community connections.

Types of Crowdfunding:

  • Reward-based: Backers receive products or perks (Kickstarter, Indiegogo)
  • Equity-based: Backers receive ownership shares (SeedInvest, Wefunder)
  • Debt-based: Backers lend money to be repaid with interest (Kiva, Funding Circle)
  • Donation-based: Backers donate without expectation of return (GoFundMe)

Advantages:

  • No debt or equity dilution with reward-based models
  • Built-in marketing and customer validation
  • Creates community of supporters
  • No repayment required for reward/donation models

Challenges:

  • Success rates are low (most campaigns fail)
  • Requires significant marketing effort
  • Platform fees (typically 5-10%)
  • Public failure risk if goals aren't met
  • Fulfillment challenges with reward-based models

Case Study: Sara Blakely's Creative Financing Approach

When Sara Blakely was building Spanx, she took an unconventional approach to financing her business expansion:

  1. Started with just $5,000 of personal savings
  2. Kept her day job selling fax machines while developing her product
  3. Used credit cards strategically for early production runs
  4. Negotiated favorable payment terms with manufacturers
  5. Reinvested all profits back into the business
  6. Maintained 100% ownership without taking on investors
  7. Grew to $4 million in sales in the first year and $10 million in the second year
  8. Expanded to a billion-dollar valuation without traditional business loans

Blakely's approach demonstrates that creative financing strategies, careful cash flow management, and strategic reinvestment can fuel significant business growth without traditional financing.

Other Alternative Financing Options

Purchase Order Financing

Funding that helps you fulfill large orders by paying your suppliers directly.

Best for: Businesses that need capital to fulfill large orders.

Revenue-Based Financing

Funding repaid as a percentage of monthly revenue rather than fixed payments.

Best for: Growing businesses with steady revenue streams.

Asset-Based Lending

Loans secured by business assets like inventory, equipment, or real estate.

Best for: Businesses with significant tangible assets but limited cash flow.

Peer-to-Peer Lending

Online platforms that connect businesses with individual lenders.

Best for: Businesses that may not qualify for traditional bank loans but have solid growth plans.

Key Takeaways: Alternative Financing

  • Alternative financing options often provide faster access to capital than traditional loans
  • Each alternative has specific use cases where it excels—match the financing to your specific expansion needs
  • Higher costs are typically the trade-off for speed and flexibility
  • Consider combining multiple financing methods for different aspects of your expansion
  • Always calculate the true cost of financing before committing

Related Financing Options

Alternative financing methods are just part of the expansion funding landscape. Consider exploring these other options: