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Finance without borrowing

Guest post by: David Banfield

Article Overview: Small business owners continue to be victims of the 'credit crunch'. Thee are however funding alternatives in the secondary finance market place that can unlock capital for growth. Sometime you have to look beyond the main street banks to find just what you need to help accelerate the growth of your business.

Finance without borrowing

Nobody goes into business to fail. That’s surely a redundant statement, but the reality is that a vast number of small businesses do fail and they fail very early in their existence. Most start-ups never live to see their fifth anniversary.

Many entrepreneurs today find that they have a growing business on their hands, and that has happened more by accident than good planning and sound judgment. Small business owners tend to grow their businesses with little or no long-term planning and no strategy to allow for growth and all of the attendant headaches that it can bring.

Invariably the biggest of those headaches is working capital. If a business owner actually creates a business plan and the supporting cash flow statements, then it quickly becomes evident that as growth occurs there is a demand for additional working capital. The more growth, the more capital it takes.

Knowing that such a demand is in the forecast should alert business owners to plan for that time period and have a solution ready when the cash is needed. Unfortunately the statistics show that is not the case - the eternal optimism of entrepreneurs usually addresses the issue by assuming it will take care of itself at the appropriate time. That inevitably proves to be the beginning of their downfall.

Others who create the plan and think that when the time is right they will approach their bank for a business loan are equally naïve in their thinking. The banking opportunities currently are few and far between – banks seem to have their priority revolving around maintaining their deposit base without stepping into the small business-lending arena. Some years ago it might have proved fairly straightforward for a small business with a good track record and ample security to obtain sufficient financing from their bank to enable them to expand. Unfortunately times have changed.

Where does that leave the business owner if the ‘main street’ banks are effectively closed? It certainly does curtail their options and basically forces them to seek assistance in the secondary financing marketplace – for many, a marketplace that is almost unknown. This secondary marketplace consists of what are known as ‘non-bank’ lenders and funders. The title is easy to understand – these companies, providing funding, solutions are not banks.

If they are not banks and, therefore, do not offer traditional ‘loans’ and ’lines of credit’, then what is on offer? In fact, the range of financial services and solutions is quite substantial and often a small business can quickly find a financing match for their particular circumstances.

The range of non-bank lending services embraces such things as leasing, purchase order financing, factoring, asset based lending, invoice discounting, inventory financing, international trade financing, and more. Because banks have for so long been the universal provider of business funding, little was known about the operations and services of these ‘other’ companies. Now with banks taking a back seat in the financing marketplace, the secondary marketplace is taking on a more important and prominent role in the funding of small businesses.

The majority of companies operating in the ‘non-bank’ lending area do, in fact, lend money. Loans are often structured against specific company assets such as equipment, accounts receivable, rolling stock and inventory. Loans may be of a revolving or fixed nature and may stretch over months or years. Not all funding however is based on a lender-borrower relationship.

Invoice Discounting is one such service. In this form of funding the user of the service actually sells accounts receivable to the discounter and the whole transaction is built around a buy/sell arrangement. This naturally means for the user of the service there is no ‘loan’ to repay at a later date. What has happened is that their cash flow has accelerated and customers who normally pay in 30, 40, or even 60 days time will still pay in that time cycle however the discounter will have speeded up the process for the user by buying and paying for the invoice well I advance of the actual due date.

This type of service is often geared specifically to small entrepreneurial companies that are expanding rapidly. There are many advantages to this form of finance versus a more traditional lender/borrower relationship. One distinct advantage is that the user is in fact using their own assets to fund their expansion, no outside capital has really been employed and no debt obligations have been incurred.

With banks and traditional lenders all cutting back there is still an opportunity for small business owners to grow their business-they just need to look outside of the conventional borrowing box.

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Article Tags: asset finace, borrowing, finance, funding, loans, small busness



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