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Traditional vs. Non- Traditional Financing – What are the differences?

Guest post by: Stan Prokop

Article Overview: The articles provide insights into the concept of traditional vs. non traditional sources of financing for business owners and financial managers

Traditional vs. Non- Traditional Financing – What are the differences?

Business owners at either start up or sometime in the business existence need financing. Many a joke has been offered regarding financing offers when you don't need it, however if you need financing to survive that becomes a different story.

Business owners must be able to assess whether they are candidates for traditional or non- traditional financing. Traditional lenders want to grow your business; they are not looking to fix your problems.

When business owners have to attract additional equity the problem usually is that they have to give up a healthy piece of the ownership of the firm.

So who are these 'Traditional 'lenders? It is essentially a short list:

Banks and Trust Co's

Independent Finance companies

Venture Capitalists /Private Equity Firms

Government

Let's discuss some of the basics of those traditional players. Banks are the most obvious of all traditional lenders - they focus on assets and collateral and personal guarantees of the principals. If a firm cannot meet their lending criteria it's three strikes and you are out scenario.

Venture Capital firms look for healthy portions of a firm's equity. They want big gains over a longer period of time. Generally venture capital deals are very significant in dollar size. These funders are very professional and have deep pockets, backed often by large institutions. We feel strongly that the biggest mistake firms make when contemplating venture capital is either the small size of their transaction, or that funds are being solicited for the wrong reasons.

Independent Finance firms are largely collateral based. Rates are typically a bit higher than bank type rates , and specialties include leasing and based lending']);"> asset based lending , as well as non bank working capital arrangements , commonly called ' ABL''s.

Various government loans and grants are available to business borrowers. They have very good rates and good structures - the main complaint of borrowers is time to consummate a transaction.

Non- Traditional Lenders: This group can be categorized in 4 categories.

Employees

Friends/Family

Private third party lenders

Suppliers

Most business owners do not realize key employees are often an untapped source of capital. They have a vested interest in their employment and careers, and often want to be considered for ownership and in succession scenarios. Management buyouts are a very common and quite successful strategy.

Friend and Family is of course a sensitive area - we all know comments made around mixing friends, family and money. Care is required in this area.

Most business owners never consider suppliers as a form of potential capital. This group has a vested interest in making your firm successful - your firm is a customer, and they quite often can see the advantage of some sort of strategic alliance. Even a simple restructuring of your payments to a key supplier can bring valuable capital to your firm

In summary, there are various sources of traditional and non-traditional funds available to business owner. They certainly are not unlimited in choice, and every business has a unique need and situation that requires a special focus and assessment.

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Article Tags: nontraditional financing, traditional lending



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