Alternative business financing
Many investors will always know of the most conventional ways of obtaining business financing. Of these, very few will be aware of the fact that aside from commercial bank loans and self financing, there are a myriad of other tools and means of obtaining business capital.
These will include angel financing, venture capital, corporate venture capital and Initial Public Offerings. Even fewer will know about factoring, commercial finance lines, advance pay programs, purchase order financing, peer to peer lending, property leasing and supplier guarantees.
Frank Hennessy, the Chairman and CEO of Hennessy Capital points out the fact that even professional advisers, consultants and bankers are unaware or hesitant to advance such proposals to their borrowers. We shall try to demystify the non obvious alternative business financing methods.
Factoring as an alternative method of financing a business
Commercial banks and indeed many other lending institutions are now avoiding high risk loans due to regulatory pressure and the general inability of borrowers to service loans. Blame may easily be placed on the current state of the world economy or any other theory that economists may advance. Accounts receivable financing, popularly known as factoring is now provided by companies that specialize in this form of alternative financing.
When commercial banks shy away from lending these that it considers being high risk, these companies lend. They do not base their conditions on the cash inflow of cash outflow of the borrower. Factoring companies have much of their interest placed in the creditworthiness of the borrowers’ debtors.
The way it works is that the factor will purchase the clients accounts receivables. All invoices are considered to be assets for the intending borrower and it is worthwhile to note this alternative method of business financing can be used to service payroll deficits, paying off suppliers or injecting fresh capital in the business.
Supplier guarantee
This is a tripartite agreement involving a lender, the borrower and the supplier. When the customers of a business have confirmed to the lender that they have received the ordered goods or services, it is said that receivables have been created. This allows the lender to confirm with the borrower on the value and quantity of goods or services offered.
A payment is then made to the suppliers of the goods directly and not to the borrower. Advantages of this scheme as an alternative mode of obtaining finance include accelerated business growth, additional payment discounts from suppliers, greater access to suppliers and, off course, a better reputation.
Purchase order financing
Manufacturing companies are usually fond of using this as an alternative mode of financing a business. The gist of it is that money is advanced against a purchase order for upgrading of existing goods or the manufacture of absolutely new products. The manufacturer technically assigns the ownership of the purchase value to the lender.
Advance pay programs
This facility is designed for business owners with credit card sales. How it works is that the lender will purchase a fixed figure of the borrowers’ credit card receivables and extends to the borrower money at a discounted rate. He will then collect his/her money from the credit cards until full payment of the money extended is received. This alternative to business financing allows businesses to have access to working capital quite easily.
It is quite possible to find different products from jurisdiction to jurisdiction. Business owners should consider it proper to conduct a thorough research and seek advice before they embrace alternative means of financing.
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