Before the Bank: Options For Financing Your Business

money_bagsI always tell small business owners that if they can secure bank financing to meet their working capital needs, by all means, go for it. Banks have their purpose, but as many small- to mid-size companies have discovered, they aren’t always in a position to lend.

That’s where non-bank lenders come in. They offer options such as factoring and asset-based lending, which frequently allow companies to say “yes” to new opportunities that wouldn’t otherwise be possible.

Factoring refers to the selling of a company’s account receivables to a factoring company to receive immediate cash, typically 70%-90% of the invoice amount. The remainder of the money, minus a small factoring fee, is paid to the business once the customer invoice (receivable) has been paid in full. Factoring can work for a variety of businesses, including manufacturing, service, distribution, and wholesale.

For companies with new sales orders, it is a way for businesses to fund their working capital needs. Service businesses with heavy payroll needs are perfect candidates for factoring because it bridges the gap between when services are rendered and when customers pay their bills. In addition, factors provide customer credit monitoring, receivable management, and even billing and payroll services for their clients. Factoring relies on the customer’s credit and not on the financial history of the business, which makes it ideal for businesses that lack a financial track record.

The other solution is asset-based lending, which is a revolving line of credit based on various asset classes such as accounts receivable, inventory, equipment, or real estate. Asset-based lending is often viewed as a stepping stone to traditional bank financing, with loans focused on the value of the asset and not solely on a company’s cash flow.

Both solutions are designed to help companies take on new business or larger opportunities from existing customers, to expand product and service offerings, establish global operations, and transition from past losses to current profits.

When credit is tight, the reality of paying a bit more for access to capital is much more palatable, especially when the alternative is shuttered businesses, missed opportunities for new business, and the inevitable layoff of skilled and valued staff. Frustrated entrepreneurs unsuccessful in their efforts to obtain working capital are welcoming the opportunity to obtain financing through factoring and asset-based lending, especially as they research its history and find credibility and flexibility. And most bankers are supporters as well because they can refer business to factor and ABL lenders that they cannot help today, but would like to in the future.

Here’s a perfect example –

A supplier of industrial materials with international sources needed working capital for expansion. He went to his banker, but was turned away because he did not fit into their lending guidelines.

The banker referred the company to a non-bank lender, who set up an asset-based loan structure, which created more credit availability and focused on the value of assets vs. solely on past financial performance. The lender then went to the bank, asking them to participate and together, they worked out a deal that used funds from both lending sources. The loan was managed and monitored by the non-bank lender and the bank was able to establish the relationship immediately.

Another example involves a newly-launched service company that needed funding for payroll. The business was selling personnel services to high-quality customers, but lacked the track record to qualify for bank financing. The business was able to factor its receivables to fund payroll and then transfer into a line of credit with the same institution in order to reduce costs as the company grew its business.

Examples like these allow banks to maintain the client relationship, all while being able to still offer more traditional services like credit cards and business checking accounts. Business owners shouldn’t be concerned that non-bank lenders will interfere with bank relationships and future lending opportunities.

Credible firms, which offer complementary financing products that fall under an asset-based lending umbrella, don’t compete with banks, they partner with them. Accordingly, relationships between traditional banks and non-bank financing firms are mutually respectful. This makes non-bank lending a win-win for both banks and businesses.

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Weekly Resource #6 – Inner City Capital Connections

ICIC logo - Copy

Is your small business in an economically distressed city?

Inner City Capital Connections (ICCC) is a free, national program designed to help you access the capital necessary to achieve sustainable growth & provide employment opportunities for residents.

Brought to you by the Initiative for a Competitive Inner City (ICIC), ICCC provides financial education and peer-to-peer mentoring for investment-ready companies and facilitates relationships with debt & equity providers and business strategy experts.  Participants gain practice and a thorough understanding of how to successfully pitch their business to capital investors.

Companies in 133 cities and 35 states have already leveraged this training with successful results.  Eighty-nine percent of them raised capital within 2 years of participation and 55% did so within a year.  Could you be next?  ICIC is now accepting applications for upcoming executive education seminars in the following cities:

Cleveland     –     Detroit

Designed for company owners and taught by respected experts, this interactive program explores  a variety of business finance options and teaches the importance of building your capacity to successful prepare for and manage the subsequent growth.  Select participants will earn the opportunity to showcase their learning and market their companies at the ICCC Conference at Fortune Magazine in New York City.  Past participants have been featured in such esteemed publications as:  The Wall Street JournalReutersInc.PortfolioPE HubMSN Money, and Small Business Television.

Successful applicants have represented diverse industries & backgrounds, but all are of sufficient size and strength to attract the growth capital needed to increase revenues and jobs in their inner cities.  If this sounds like you, click here for application information:  ClevelandDetroit.

“Money, It’s a Gas.” – Part 1

“Money, it’s a gas.  Grab that cash with both hands.”
– Money, Pink Floyd – Dark Side of the Moon

Wouldn’t every entrepreneur with an inspired idea and every small business owner with a current opportunity love to take this advice and grab the cash?  Unfortunately, many aren’t clear about the funding options available to them during their various stages of business development and, therefore, often reach for something they’re either not ready for or are ineligible to receive.

I frequently meet and consult with people who have great ideas for a community-based small businesses.  Some already have well developed plans for launching and a great chance of success.  But they need some start-up capital, so they’re asking about angel investors or grant money.

What they often don’t know is:

  • Government grants for funding private enterprise generally don’t exist; and
  • Typical equity investors, i.e. angels or venture capitalists, are interested only in highly scalable, growth-oriented ventures because they represent the highest return on investment potential.

Therefore, lifestyle businesses are reliant on fundraising from friends and family, crowdfunding, traditional bank loans, and community-based microenterprise lending programs.  The most obvious, but often overlooked, financing source is sales.  But that’s a subject for another post.

For now, let’s focus on external funding sources available at various stages in the business life cycle.  The following graphs, used with permission from Han Peng, Manager of Entrepreneurial Programs at TechTown Detroit in Michigan, help illustrate how profitability, time and stage impact your financing options.  The first is general and works across geographic boundaries, while the second adds a layer to illustrate some specific Michigan program examples.  I’m confident the principles can be applied to similar programs across state lines.

Graph 1.0

Printed with permission from Han Peng, TechTown Detroit

Printed with permission from Han Peng, TechTown Detroit

Graph 2.0

Printed with permission from Han Peng, TechTown Detroit

Printed with permission from Han Peng, TechTown Detroit

These graphs don’t take industry, location, ownership designation, or other individual characteristics of the business into account, but it’s important to note those factors can also have a great effect on an entrepreneur’s or small business owner’s eligibility for funding, as can the application itself.  Knowing how and when to prepare and present your ask is critical to a successful capital raise campaign at all levels, from friends and family loans to venture capital investments.  Stay tuned for a future post with those helpful tips.