Friday, March 4, 2011

Alternative Financing: Is it right for you?



These days getting a bank loan is very difficult. What is a business to do? There are other alternatives than the standard model of going to the bank for a loan.

Some financing alternatives are difficult but possible, others are extremely expensive but possible and some are not suggested but possible. With the current economic situation, a business must look at all of its possibilities.

Don't Borrow Any Money, Ever! - This is extremely difficult but possible. You plow earnings back into your business. It is slower, but gives you a solid foundation for true growth of your business. Too may people equate wealth with profit, it is not. Wealth is equity. It is what you actually own after everything else is paid.

"Love Money"- The people that love you (friends and family) lend you the money. there are pitfalls to this however. To quote Dave Ramsey, "whenever you borrow money from your family, somehow the Thanksgiving turkey tastes different". This is generally not a business transaction, it is a relationship transaction. Therefore, unexpected business problems could damage you relationship with the people who love you. Is it worth it?

Home Equity Funding - This involves taking a second mortgage on your home to raise money for your business. This method was very common in the past but with the real estate crisis this method has virtually dried up as a method of raising funds. It may still be an option in the future but less so now.

Trade Credit - To keep your business, some suppliers will give you terms for the things you buy from them. To example, you buy a piece of inventory from a supplier and they will give you terms of 30 days. This is a way of stretching your dollars buy by buying on things on credit. the downside to this is if you don't pay on time, a valuable supplier can cut you off or insist on COD.

Credit Cards - This is a highly dangerous way of financing because of the very high interest rates. I know of very successful multi-million businesses that have started with credit cards, however due to the risks it is not suggested.

Factoring Your Invoices - A factoring company buys your accounts receivable. They will give you a discounted amount immediately and they will do the collections. There are two general types of factoring: with recourse and without recourse. With recourse means that if you accounts receivable is not paid by a certain time they will give it back to you and they will want their money back. without recourse means that you just sell it to them. The downside is that they will discount (pay less than the face value) of the accounts receivable. You will be receiving immediate cash but the cost is very high.

Sell a Percentage of Your Business - Another money of raising money is to sell a percentage of the business for cash. In doing so, you are taking on partner. This is a viable way of raising cash but you are slicing up the pie.

Have Your Customers Pre-Pay - Let's say for example, you are a manufacturing company and an order comes in to build one of your products. You can ask for a percentage up-front before starting the manufacturing process. This is a way of bringing in some cash and assuring payment.

Private Placement Loan - This is becoming more common, especially with the advent of the Internet and very low interest rates available for savings. this entails borrowing money from an individual (non-family) at set terms. At this time, this is a small niche of the lending market but growing.

Non-Bank Lenders-Some non-profit economic development organization will lend money much in the same way a bank will. there may be special lending criteria and limits depending on the non-profit group, but funding is available.