Sources of Finance for Small Business

“Alternative Finance”

Financing Small Business

Overview

Who needs financing and why

Where do companies go first

Where do companies go next

What can new companies expect

What alternatives exist

Why is Financing Important?

Starting a new business

Growing a business

Initial Financing

Where do you go first?

Your own savings

Your own retirement savings

Your friends

Your own home equity

Other funds

When Growth Exceeds Capital

Visit your banker

Apply for a home-equity line of credit

Apply for a community development grant

or loan

Apply for an SBA loan

Apply for a business loan

What Are Bankers Looking For?

Business Plan

Sources of Repayment

Company Balance Sheet

Company Income Statement

Personal Statement of Net Worth

Personal and company tax returns

ASSETS

What are the Alternatives?

Angel Investors or Venture Capital Companies

Asset-Based Lenders

Purchase-Order Financing Companies

Equipment Leasing Companies

Factoring Companies

Invoice Discounting Companies

Angel Investors or Venture Capital Companies

Who do they finance?

New companies with cutting-edge idea or

product

Newer companies with business plan

Angel Investors or Venture Capital Companies

What are they looking for?

An opportunity to make a good return on

investment

Usually will want an equity position and

many times a management or controlling

position

Sometimes will finance with loans

Peer-to-Peer Lending

Asset-Based Lenders

Have to have assets!

Real estate

Machinery

Patents or trademarks

Inventory

Receivables

All of the above

Asset-Based Lenders

What will it cost?

The amount charged will depend on the

amount and quality of your assets

Typically it will be more than a bank

would charge

Remember, your bank has declined to

finance your business

What is the opportunity you have?

Purchase Order Financing Companies

How does it work?

Obtain official Purchase Order from your

customer

Customer has to have good credit

Find a reliable supplier/manufacturer for

your product, domestic or foreign

Place order with supplier/manufacturer

Purchase-Order Financing Companies

Who do they finance?

New manufacturers

Established manufacturers

Small and large companies

Companies with domestic-sourced or

foreign-sourced manufacturing

Equipment Leasing Companies

How does it work?

Use this when you need equipment to manufacture

goods

Or for office equipment

Leasing company purchases equipment and “rents” it

to you

Opportunity to purchase equipment at end of lease

period

Factoring Companies

What is factoring?

Loan money using accounts receivable as collateral

Usually with recourse to company and company owners

Usually requires that all receivables be pledged

With or without notification to your customer

Manages collection of accounts

Speeds up cash flow

Factoring Companies

What does it cost?

How much advanced depends on credit quality

of A/R

Interest rate depends on credit quality of A/R

Fees imposed for collection service

Invoice Discounting Companies

How Does It Work?

Similar to factoring companies

Recourse or non-recourse

Notification to customer

Purchases all or some of the invoices

Credit quality of your company is less important

Credit quality of customer is most important

Invoice Discounting Companies

What does it cost?

Fund 90% of face value of invoice

Cost depends on time outstanding, computed daily

Flexibility reduces cost

Use it as you need it

Quick decision and funding.

Summary

SBA loans will be the least expensive, but slow to fund

Traditional bank financing next cheapest

Different types of alternative finance

Choose alternative depending on need, cost, and position

in company history

Most important: What is Your Opportunity?

The $64,000 Question

How do You Find These

Alternative Financing Companies

Yellow Pages

Other business associates

The Internet

Internet Resources

Angel Investors

www.angelcapitalassociation.org

Asset-Based Lending

http://www.cfa.com/What_is_ABL/what_is_abl.htm

Peer-to-Peer Lendingwww.prosper.com, www.lendingtree.com, www.zopa.com

More Internet Resources

Search for These Terms

Small Business Funding

Asset Based Lenders

Equipment Leasing Companies

Purchase Order Financing

Factors

Invoice Discounters