Getting new and growing companies financed has become difficult in today’s business environment. Economic conditions combined with the real estate market drop and tighter lending standards have left many entrepreneurs scratching their heads over how to finance their ventures.
“Home equity lines and credit cards were the financing avenues of choice for small companies, but those options have tightened substantially over the last year or so,” says Dan Dreschel, CEO at Atlanta-based FTRANS, a provider of accounts receivable outsourcing and credit management solutions. “Bank loans have always been difficult for small companies to get, and they’re even more elusive now.”
The climate is pushing companies to seek out creative financing options that go beyond the bank lines of credit and U.S. Small Business Administration-backed loans. Here are four options to consider if you’re looking to startup a new company or grow an existing firm:
MarKel Snyder found a solution for his firm’s financial needs at TechColumbus, a nonprofit organization focused on technology-based economic development in the 15 counties of central Ohio. The organization provides professional development, business assistance and financing for technology firms of all sizes. As founder and CEO of Columbus-based software developer GotGame?Media, Snyder approached TechColumbus with his business model and got invited to “pitch” the idea to the organization’s investment committee.
Snyder walked away with a $50,000 grant from TechColumbus’ TechStart program earlier this year. “We’re using it for market research and product development,” says Snyder, who initially solicited investments from friends and family, but avoided banks due to the economic conditions. “We had a new concept with no initial revenue attached to it, so we needed a funding source that understood that. We found it at the business incubator.” (Find business incubators in your area by visiting the National Business Incubation Association online at www.nbia.org)
Defined as the lending of money by a company to one of its customers so the customer can buy products from it, vendor financing allows the company to increase its sales even though it is basically buying its own products. The strategy allows small businesses to purchase the equipment and software that it needs to grow, for example, without having to rely on a bank loan or self-financing.
Michael Johnson, director of the Chicago Urban League’s nextONE business acceleration program, says vendor financing paid off recently for an African American-owned collection service that used the strategy to acquire an expensive software upgrade. The small business worked out an arrangement with the software vendor, which sold the upgrade for just a small down payment. The collection agency has since landed two large contracts due to its increased efficiency.