Business Financing Alternatives

by: SBC Staff

Small businesses have a variety of financing alternatives available to them.  Sadly, most of them are inadequate or difficult to qualify for.  If you have pristine credit, you can get business financing through your own bank, but that's based on your personal credit, not your business' credit.  You can apply for a Small Business Administration loan, which is actually a guarantee from the SBA (your bank is making the loan), but these can be even harder to qualify for.  Again, your credit will have to be impeccable.  So maybe your credit isn't good enough to borrow the funds required by your business; what other choices do you have?  Here are some options you should consider:

Venture Capital - You may have never considered venture capital.  Possibly you think such funding was reserved for high tech companies before everyone got wise but not for the everyday business like yours.  Venture capitalists are interested in making money on their investment.  If your business provides a vehicle for growth, you may be a candidate.  This is some of the most difficult financing to obtain, and there are those companies that will charge you a substantial fee up front with no guarantee of results.  But if your business has growth potential, you have a solid management team, and you can put together a top-notch business plan, it may be worth the effort to apply.  If you need help determining whether your business could qualify and what you would need to do to make it happen, give us a call or submit the form on our Business Consulting page.  You need to be careful who you deal with.  As mentioned earlier, companies exist that will charge you up front, make no guarantees, and essentially do nothing once they've cashed your check.

Leasing - If you need equipment, make every effort to lease it when you're in need of funds.  Leasing will leave your credit lines and operating capital available for other purposes.  While leasing will leave the liabilities section of your balance sheet looking healthier, if the leases are significant to your business the footnotes to your financial statements will disclose your minimum lease commitments.  Additionally, if the leases meet certain requirements, the leases may be recorded as purchases which will affect your balance sheet.

Outsourcing - In an outsourcing arrangement, you turn over control of one or more of your business functions to an outside firm.  For a fixed fee per month or year, this firm bears all the responsibility and cost of that function.  You should be able to save costs with an outsourcing agreement and, in some cases, you can shift upfront capital expenditures to the outsourcer.  For example, if you outsource your information technology functions to Peak Consulting, we buy your servers, workstations, software, etc. up front, supply you with IT personnel, purchase consumables such as toner, and charge you a monthly fee for all these services.  This not only saves you up to 60% of the cost, but you spread the cost over a number of years.  This is an off-balance-sheet financing technique, like leasing, that leaves your credit lines and other available credit and operating cash available for other purposes.  If you'd like more information on our outsourcing services, visit our Small Business Outsourcing Services page on this site.

Receivable Factoring - If your business regularly carries receivables and you have a good collection history, there are many companies who will buy your receivables at a discount and collect them for you.  The discount rate may be higher than the rate you would get from a bank on a commercial loan, but it may be possible to get this type of loan even though the bank turns you down.  Even though the factor technically "buys" the receivables, this transaction is still a loan.  If your customer doesn't pay the invoice, you buy it back.

Merger - If you can find a company in your industry or in a complementary industry that has excess cash but needs something you have, you might be able to float a merger and maintain control.  Perhaps you have a premier management team, a product that is the envy of the market, technical expertise that is unparalleled, but simply lack the cash to do what needs to be done to take advantage of all these assets.  You need to find a company that has cash but lacks the aforementioned assets.  If the company happens to be public, your combined ability to raise cash through additional stock offerings might be outstanding.

Joint Ventures - The situation here is similar to that discussed under mergers, but in this case, your companies will remain separate.  Perhaps you need cash to bring a new product to market.  Again, find a company that has complementary products and lots of cash and approach them about joint venturing your new product launch.  You will be giving up half the profits, but half is better than what you'll get if you cannot raise the cash to launch the product.

Now for some options you should avoid:

Credit Cards - Don't do it!  You'll be digging an even deeper hole for yourself.

Brokers Who Charge Up Front Fees - There are too many good brokers out there who get paid when they deliver to waste your money on firms or individuals who charge substantial fees up front and make no guarantees.

Slow Paying or Not Paying Your Withholding Taxes - Never, ever do this!  You'll get into more trouble than you would ever believe.  You can incur penalties up to 100% of the tax if you are deemed a "responsible party" for withholding purposes.  Plus the interest rate is worse than credit cards.  And you can't get out of these liabilities even if you file bankruptcy.  You may spend the rest of your life paying off this kind of debt.

We hope the above information is helpful to you.  As always, if we can be of service to you, let us know.