Sources of Finance for Small Business

“Alternative Finance”

Finance for SMEsFinance for SMEs

OverviewOverview

Who needs financing and why Where do companies go first Where do companies go next What can new companies expect What alternatives exist

What is an SMEWhat is an SME

No single universally accepted definition of a small or medium sized enterpriseGenerally based on turnover, number of its employees, borrowingsor a combination thereof

Initial FinancingInitial Financing

Where do you go first?

The banks Your savings / retirement funds / house Friends / family / “fools” Asset sales Non bank financial institutions

Source: CPA Australia Asia Pac Small business survey 2010

Limited funding optionsLimited funding options

Compared with large companies, smaller businesses tend to make greater use of debt funding And less use of equity funding

The good old days?The good old days?

From the late 1990s till 2007...small businesses generally had sufficient access to bank finance.Unlikely to be a swift return to the conditions prior to the GFC Such conditions probably were unsustainable across all sectors of the economy

Bank loans harder to getBank loans harder to get

Fallout from GFC changed the risk profile of most businessesBanks undertook to mitigate their risks with a review their loan portfolios Many businesses were required to agree to changed loan conditions.

CompetitionCompetition

Australian banking customers are currently served by a wide range of providers12 Australian-owned banks; 9 foreign-owned bank subsidiaries; 35 foreign bank branches11 building societies more than 100 credit unionsMoves to strengthen the mutual sector to promote competition

What Are Banks Looking For?What Are Banks Looking For?

Business Plan Sources of Repayment Company Balance Sheet Company Income Statement Personal Statement of Net Worth Personal and company tax returns ASSETS and ability to repay

Non bank financial institutionsNon bank financial institutions

What are NBFIs ?

No banking license or not supervised NBFIs facilitate bank-related financial services, such as investment, contractual savings, and market brokeringExamples of these include insurance firms, pawn shops, currency exchanges, and microloan providers

What are some Alternatives?What are some Alternatives?

In addition to banks / non bank financial institutions:

Angel Investors or Venture Capital CompaniesAsset-Based LendersEquipment LeasingPurchase-Order FinancingStock financingA/cs receivable - Factoring Companies A/cs receivable - Invoice Discounting

Who do they finance?

New companies with cutting-edge idea or product

Newer companies with business plan

Venture CapitalistsVenture Capitalists

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

Venture CapitalistsVenture Capitalists

Have to have assets!

Real estate Machinery Patents or trademarks Inventory Receivables All of the above

Asset-Based LendersAsset-Based Lenders

Asset-Based LendersAsset-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

Equipment LeasingEquipment Leasing

How does it work?

Manufacturing or office equipment Leasing company purchases equipment and

“rents” it to you Opportunity to purchase equipment at end of

lease period

Purchase Order FinancingPurchase Order Financing

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

FactoringFactoring

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

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

FactoringFactoring

Invoice DiscountingInvoice Discounting

How Does It Work?

Simplified factoring Single or multiple invoices Is not usually credit management or accounting Is not usually collecting debts Credit quality of customer is most important

SummarySummary

Traditional bank financing cheapest Banks normally require property security Landscape has changed Different types of alternative finance Choice and mix depends on need, cost, position in

company history

The $64,000 QuestionThe $64,000 Question

How do You FindAlternative Financing Companies

The Internet / Yellow Pages Brokers Business associates

Internet ResourcesInternet Resources

Search for these terms

◦Asset Based Lenders◦Equipment Leasing Companies◦Purchase Order Financing◦Factors◦Invoice Discounters