Tweet

Alternative and Non-Bank Financing: Don’t Be Afraid!

Guest post by: Tom Klausen

Article Overview: Despite the tight credit environment, there are many alternative and non-bank financing options available to companies that need a cash infusion. However, business owners often shy away from non-bank financing because they don’t understand it. To help ease some of the fear that owners often have of alternative financing, here is a description of the most common types of non-bank financing. There are many struggling businesses out there today that could benefit from one of these alternative financing options.

Alternative and Non-Bank Financing: Don’t Be Afraid!

The good news is that, despite the tight credit environment, there are many alternative and non-bank financing options available to companies that need a cash infusion, whether it’s to beef up working capital or help facilitate growth.

However, the bad news is that business owners often shy away from non-bank financing because they don’t understand it. Most owners simply rely on their banker for financial information and many bankers (not surprisingly) have only limited experience with options beyond those offered by the bank.

To help ease some of the fear that owners often have of alternative financing, here is a description of the most common types of non-bank financing. There are many struggling businesses out there today that could benefit from one of these alternative financing options:

Full-Service Factoring: If a business has financial challenges, full-service factoring is a good solution. The business sells its outstanding accounts receivable on an ongoing basis to a commercial finance company (also referred to as a factoring company) at a discount—typically between 2-4 percent—and then the factoring company manages the receivable until it is paid. It is a great alternative when a traditional line of credit is simply not available. There are a number of variables to a program, including full recourse, non-recourse, notification and non-notification.

Spot Factoring: Here, a business can sell just one of its invoices to a factoring company without any commitment to minimum volumes or terms. It sounds like a good solution but it should be used sparingly. Spot factoring is typically more expensive than full-service factoring (in the 5-8 percent discount range) and usually requires extensive controls. In most cases, it does not solve the underlying lack of working capital issue.

Accounts Receivable (A/R) Financing: A/R financing is an ideal solution for companies that are not yet bankable but have good financial statements and need more money than a traditional lender will provide. The business must submit all of its invoices through to the A/R finance company and pay a collateral management fee of about 1-2 percent to have them professionally managed. A borrowing base is calculated daily and when funds are requested an interest rate of Prime plus 1 to 5 points is applied. If and when the company becomes bankable, it is a fairly easy transition to a traditional bank line of credit.

Asset-Based Lending (ABL): This is a facility secured by all the assets of a company, including A/R, equipment, real estate and inventory. It’s a good alternative for companies with the right mix of assets and a need for at least $1 million. The business continues to manage and collect its own receivables but submits an aging report each month to the ABL company, which will review and periodically audit the reports. Fees and interest make this product more expensive than traditional bank financing, but in many cases it provides access to more capital. In the right situation, this can be a very fair trade-off.

Purchase Order (PO) Financing: Ideal for a business that has a purchase order(s) but lacks the supplier credit needed to fill it. The business must be able to demonstrate a history of completing orders, and the account debtor placing the order must be financially strong. In most cases, a PO finance company requires the involvement of a factor or asset-based lender in the transaction. PO financing is a high-risk kind of financing, so the costs are usually very high and the due diligence required is quite intense.

The message I am trying to convey is simply that financially challenged business owners should not be afraid to consider alternative or non-bank financing options. It’s a fairly simple matter to learn what they are, how much they cost and how they work. Alternative financing is a much better option than facing the challenges of growth or turnaround alone. It is a known fact that the vast majority of business failures are due to a lack of working capital—but it doesn’t have to be that way.

With a better understanding of these different types of non-bank financing, you’ll be in a better position to decide if they might be the answer to your financing challenges.

Related Articles
  Working Capital Financing - 10 Reasons Not to Factor Receivables in Canada
  ALTERNATIVE ENRICHMENT
  How can you make more of your customers open your emails?
  What is the best way to develop my sales skills?
  Profitable Online Business Ideas and the Recession Part 2
  Let Canadian Film Tax Credit Financing In Ontario And BC Finance Your Productions!
  Alternatives and Tips On Working Capital Finance By Banks
  We’re Sharing the biggest Secret in business funding today and why factoring of accounts receivables isn’t what you thought!
  Without an ABL Lending And Loan Facility Financing Where Will You Be Tomorrow ? A Canadian Non - Bank Alternative !
  Pitfalls And Solutions When You Finance A Franchise With Franchise Financing Companies In Canada
  Contribution
  Commercial Business Equipment Leasing Services Provided by Financing Companies in Canada
  Carrying On Without Cash Flow Is Not An Option ! Analysis and Solutions For Canadian Business
  The Unknown Secret In Canadian Accounts Receivable Finance - C I D Business Factoring And Financing in Canada
  How To Avoid Business Operating Cash Flow Problems And Improve Financing Success
  Factoring and Receivable Financing in Canada
  Canadian Business Line Of Credit News - Must Know Info on Non - Bank ABL Financing and A Credit Revolver Loan
  Looking for Business Financing methods? Tap into asset based lending in Canada Today – 1 2 3 You’re Saved!
  Asset Based Lines of Credit – Canadian Financing Solutions
  Real Estate Backed Financing

Article Tags: alternative financing, AR financing, assetbased lending, factoring, nonbank financing
Referred by: http://www.cfgroup.net



Related Forum Posts
Top Four Young Entrepreneur Mistakes - According to Youngmoney.com, these are the four most common mistakes made by young entrepreneurs: 1) Not enough networking 2) Not prepared for the work load 3) Lack of confidence 4) Afraid to ask family and friends for help I would add to this list not getting started in the first place. But, if these are your problems, I would suggest checking out Keith Ferrazzi's Never Eat Alone, and Guy Kawasaki's The Art of the Start, both of which provide great tactics for getting to that next level.
Re: How to Promote Your Blog – The Definitive Guide to Promoting - Great Post! Dont forget to put your blog in Anchor Text For SEO purposes for the keywords you want when getting backlinks (for example with article marketing)...Very important. You can conquer quite a few small Niches and get your site on the number 1 spot in Google!
Re: Due Diligence, Market Research.. Ahead of the curve. - Congrats! A few months ago I wrote extensively on market research. Check in the Inventors corner for the posts. Let me know if I can help further! Dont spend a dime on a protype or advertising until you do some research! Jude
Re: Who hates cold calling? - I saw this and had to chime in. I HATE COLD CALLS. lol its terrible and a wast of my time. Something i have done is gotten online and found all the networking event happening in my area for the next 2 months and i try and go to about 3 a week. Even just for an hour. Dont bring any business cards. Just meet new people ask them alot about what they do, not too much about what i do and follow up the next day or 2. Has worked well
Re: Businesswomen in the news - [quote="TheRainmaker":2susnvqs] Dont forget that the media is out for the media and scare tactics and bad news gets the coverage.... J[/quote:2susnvqs] This is true....


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

4 Steps To Hypnotize Your Business Prospects

Work Place Counselling

Living on The Edge of Chaos...

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.