Alternative Financing Solutions | Wednesday December 24th, 2003 | |
Do you need to purchase assets for your new business but don’t have three years of profitable financial statements?
Many small businesses have difficulty getting access to capital when they do not have three years of profitable financial statements, sufficient equity in the business due to start up issues or some related challenge. Yet, these types of capital resources, asset-based lenders, leasing companies, factors and others, have made a niche out of servicing these business needs. Don’t dismiss the opportunity without exploring the options. These “hard money” capital providers may be just what you need to get you through the tough times.
Asset-Based Lenders include household and commercial finance companies, which may advance funds according to traditional loan to value ratios (50 – 80%, or those which may loan more than 100% of the value of the collateral. Of course, the higher the risk, the higher the interest rate. These lenders will always require collateral such as real estate, cars, equipment, accounts receivable etc.
Factors are companies, which actually buy your accounts receivable from you, rather than loan against them. In factoring, your financial condition is not as important as the financial statement of your customer. The factor will advance funds, based on a formula, then collect the entire amount from your customer. The factor earns a fee of between 3 and 6% per month, until the account is paid in full. Upon payment, the factor deducts what was previously advanced, plus any fees then gives the company the remaining amount.
Leasing Companies are also a common way of accessing capital for assets needed in the business. You name it, from ovens, to automobiles, to forklifts, some leasing company will write an agreement on it. Leasing is attractive because it does not require a big down payment. However, the entrepreneur should consider not only the leasing costs, but additional expenses such as insurance with higher coverage and replacement costs. A "closed end" agreement provides you with the option of owning the equipment with a lump sum payment. In an "open end" agreement you may owe a lump sum, but still not own the equipment.
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