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.â€
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:
Business Incubators
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)
Vendor Financing
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.
“In a slow economy, the vendor may supply the product with a small deposit and a payment plan that makes sense for the business owner,†Johnson says. (Learn more about vendor financing online from CIT at CIT.com.)
Peer-to-Peer Lending
Small business owners looking to bypass banks and gain access to cash quickly can check out peer-to-peer lending, a concept that’s growing as more companies seek out creative financing options. This type of lending finds two individuals working together without intermediation or participation of a traditional financial institution. In the Internet age, many of the participants are finding one another and working together in the online environment (through social networking platforms, for example).
Lending Club is a peer-to-peer lending company with more than 17,000 lenders averaging $2,500 (per borrower) in loans. The organization brings together investors and creditworthy borrowers, the latter of which can get personal loans of $1,000 to $25,000 at competitive interest rates. The loans are awarded within two weeks or less, on average, with borrowers paying interest and principal monthly. (Learn more about peer-to-peer lending at Lendingclub.com or atPeer-lend.com.)
Accounts Receivable Factoring
Factoring is an age-old financing technique that’s getting more attention in this tight economy. Using this financing tool, small businesses can get invoices paid in just a few days (versus the typical 30-60 days) and use that capital for operations, accounts payable and to fund growth. Invoices are sold to a factoring firm at a discount (typically 1%-6% less than the invoice total), and the small business gets immediate use of its funds while the factoring company waits to get paid.
Dreschel says factoring can be especially useful for service businesses that
have few if any “physical†assets (such as equipment) to use for leverage. The strategy is particularly popular when “times are tough,†he says. “The harder it is to make ends meet, the more we see companies using factoring.†(There are many firms that offer factoring services. Find them online by Googling the keywords “accounts receivable factoring.â€)Regardless of which financing avenue you select, Snyder says the key to success is to stay strong and not get discouraged, particularly when your requests are rejected. Despite the challenging environment, there is a funding source out there with your company’s name on it. “Figure out ways to be creative not only when developing your product or service,†says Snyder, “but also when looking for ways to fund it.â€
Financing Tips
–Go beyond bank and Small Business Administration financing to find unique sources of funding.
–Don’t get discouraged. If one source turns you down, try the next one on your list.
–Always do your homework and investigate the funding source thoroughly before signing on the dotted line.