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If Not The Bank, Who Else?
Use alternative financing only to make your business a reality or stay in the black. Do not make these methods common practice for financing. Otherwise before you know it, the finance charges you incur will slowly eat into your profits. Know that every business eventually needs a strong relationship with a bank for a line of credit. So while playing the alternative financing field, play the traditional banking field to back you up when the time comes -- and it will.
Three creative forms of alternative financing include "factoring" or selling accounts receivable for upfront cash, finding an "angel investor", or "supplier financing."
By using these methods entrepreneurs are getting working capital to lease property, buy equipment or supplies, and pay employees. These sources are hardly giving money away but are more willing than banks to stake a risk on growing businesses. Alternative financing requires the same criteria as traditional financing: a viable idea, sound business plan and clear marketing strategies.
Factoring
Factoring accounts is one way to get cash for operating expenses. Your accounts receivable/invoices equal money. There are companies out there that will buy them from you and collect payment from your customers. In return, you pay a finance charge or discount fee on the total amount of the receivable, otherwise known as factoring. Payment from the factoring company can be as quick as a few days, as opposed to waiting on the agreed payment terms of the contract you enter with your customer.
Factoring agents are willing to buy your accounts because they believe your clients will have a good credit history, even if you don't. Factoring agents like to deal with large sums of money (i.e. $10,000 and up). You may be able to find one that will take smaller amounts, but read the fine print because the finance charges will not be worth it. Finance charges can range from as little as 2.5% to as high as 18%, which is determined by the total value of the accounts you factor. Word to the wise: Don't become comfortable with this form of financing because it will eventually catch up with you.
Where to find these financing wonders? Look in the Yellow Pages or on the Internet, proceeding with caution. Also call the American Cash Flow Association at 800-253-1294 ext. 12166 for referrals in your area or www.americancashflow.com .
Angels Investors
You have heard that common buzz word among entrepreneurs for some time, but where are they and who are they? They are wealthy business people who use their financial portfolios by investing in new businesses in hopes of getting a nice financial return. Angel networks are popping up across the country, creating databases that connect investors with businesses that need money. The networks charge access fees that vary ($400 and up) according to the services they provide. To land an angel investor is no small feat because they are typically seeking to lend funds from $100,000 to $5 million or more.
If you seek an angel, a high-net-worth individual, preferably with an entrepreneurial background to invest in your business, here are some guidelines. Look close to home. Angels will want to be actively involved in your business, which is great because they'll contribute know-how as well as capital. To facilitate that involvement, search for investors within a 50-mile radius of your company. You may have to expand your horizons but find someone within a day's drive. Concentrate on successful individuals within your industry. Angels like to invest in companies whose business lines they know. Save yourself a lot of rejection by doing some pre-selection. Approach individuals who like to take calculated risks. Since there are directories of angels popping up all over, do an Internet search for "angel investors" and add your city or state to it. Check publications that cater to private pilots, airplane owners and sailboat racers. They like risks, but they also spend a lot of time doing their homework so they can gain control over those risks. Give yourself time to carry out an effective search. It takes an estimated six months to one year just to locate the right prospective angel. Then he or she might spend another six months investigating your company and putting together the deal. Be prepared and patient.
Supplier Financing
Suppliers have a vested interest in helping you meet your capital needs. Their flexibility with loans and credit translates into successful and loyal customers. Supplier financing arrangements vary according to your needs. Keep in mind: Put everything in writing and have it viewed by an attorney. Suppliers like to make oral/handshake agreements. Do not fall for it in the heat of the moment. Make it clear you will have a written contract drawn up and, until you do, do not accept any services. Also, before agreeing to any deal, make sure the supplier's price for goods are competitive. Have a clause allowing you to renegotiate if prices change during the agreement.
An example of a supplier financing: You opened an office supply store and can not buy all the inventory needed to stock the store. So a supplier you know offers to lend you $3 million to stock the store and ship goods. In exchange they want you to buy 80% of your stock solely from them for three years or they'll lend you $1 million to buy your stock and stretch out payments over a period of two years with financing charges.
Just remember whatever you are doing, read the small print and consult a lawyer.
About the Author
Jacquéline Edwards is a Business Solution Analyst with over 15 years experience for Business Pipeline, Inc., a Business Development and Professional Training Firm designed to assist entrepreneurs, small businesses and corporations in key methods, strategies, support and resources to help start, manage and grow a business.
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