No Loan For You! : What Are Your Options?
In my previous post I outlined what it takes to get a small business loan from one of Canada's largest banks. While the approval rate of SBL's is high, I concluded that is likely because small business owners don't even attempt to get a typical loan from a bank in their first two years of existence because they know they will be rejected. So when you are a brand new company OR you have maxed out your lines of credit with the bank, what are your options? I will discuss below:
Accounts Receivable Factoring:
Is a type of asset-financing arrangement in which a company uses its receivables, which is money owed by customers as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivables have a direct effect on how much the receivables will be discounted.
Where Factoring Could Work:
Where a product or service is invoiced on Net 30-Net 90 day payment terms for work complete: Eg. Trucking, Staffing, Manufacturing, Oil and Gas.
Purchase Order Financing:
Purchase order financing involves one company paying the supplier of another company, for goods that have been ordered to fulfill a job for a customer. This is an advance and may not be for the entire amount ofthe supplies, but it will cover a large portion of it. In some cases, companies can qualify for 100% financing. The purchase order finance company will then collect the invoice from the end customer. The purchase order finance company makes their money by charging the company in need of funds various fees. These fees are taken out of the collected invoice. The remaining amount is returned to the company.
Where this could work:
Manufacturing, Distribution, Clothing, Electronics and any consumer goods made on a large scale.
Using your equipment as collateral to raise cash through a bank or alternative lender. A bank will take a filing on your equipment where as an alternative lender may take 2nd position as part of an agreement so that you can enter into some kind of other financing arrangement such as invoice factoring.
Loan against equipment:
Use the value of your existing equipment as collateral to get a loan from a financial institution.
Through an alternative lender, selling and then leasing your own equipment back to yourself in order to free up some cash.
Where Equipment Financing Could Work:
Sale- Leaseback is particularly effective if you are looking to get some kind of alternative financing but your receivables or other assets are tied up in bank loans or lines of credit. You sell your equipment in order to get the cash to pay off these loans/lines in order to get the filing taken off of them and then you lease the equipment back to yourself through an alternative lender.
Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income, directly from the processor that clears and settles the credit card payment. A company's remittances are drawn from customers' debit and credit card purchases on a daily basis until the obligation has been met. Most providers form partnerships with payment processors and take payments directly from a business owner's card-swipe terminal.
Where Merchant Advance Could Work:
This arrangement can work in situations where you run some type of retail business like a restaurant or any transactional storefront where you have customers coming in and buying goods daily.
A line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan.
Where Inventory Financing Can Work:
Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period of time than it takes them to sell their inventory to customers. Eg: Electronics, Lawn and Garden Equipment, Power Sports, Recreational Vehicles (Golf Carts, RV’s)
This is a process where someone receives many contributions of various sizes for their project or venture from a large pool of people. This usually takes place via the internet. There are numerous crowd funding websites and this has grown to a $5 billion + industry as of 2013.
Entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.
The backer receives shares of a company, usually in its early stages, in exchange for the money pledged. The company's success is determined by how successfully it can demonstrate its viability.
Where Crowd Funding could work: Service, Project, Product, Investment
This is meant as a guide for the small business owner who has been denied for a typical bank loan, or may be looking for options if that avenue has already been exhausted (as in your line of credit is maxed out) so that you can maintain cash flow for your business.
Should you have any questions about any of these methods of funding your business please don't hesitate to contact me!