Growing businesses should look beyond banks for funding that fits their needs, says Karen E. Klein
My business is selling and exporting IT equipment and I need financing to expand. There are no opportunities for funding here except for banks. Can you suggest something else?
—R.S., Petaluma, Calif. Although the economy appears to be improving, it is still difficult for many smaller companies to find working capital from traditional lenders. If you are primarily looking for export financing, try the Export-Import Bank of the United States, a federal agency designed to help finance foreign sales of U.S. goods and services. Nearly 90 percent of the agency's clients are small businesses that sell overseas. The bank provides both insurance and working capital loan guarantees for products that are shipped from the U.S. and contain at least 50 percent "U.S. content"—a formula based on direct and indirect costs such as labor, materials, research, and administration. Detailed information about the content requirements can be found at the agency's website, which also offers advice, links, and other resources for small companies. The U.S. Small Business Administration offers export working capital programs and an international trade loan program for which you might qualify, says William R. Osgood, president of The Knowledge Institute, a for-profit educational development company for entrepreneurs based in Exeter, N.H. The institute's Global Resource Network for Small Business lists California-based SBA offices and other funding resources you might look into, as well as links to the state's international trade centers. If the IT equipment you're exporting does not meet the domestic content threshold required for some of these federal programs, or you don't want a government loan, look for a commercial equipment lender. "There are companies that are only in the business of backing IT equipment. That is their reason for being," says Peter Iannone, a CPA and managing director of consulting services for CBIZ MHM, a management and accounting firm based in Los Angeles. "Particularly if you can demonstrate that you're selling to high-end clients like those doing commercial server farms or data vaults, those would be the guys I would talk to." Asset-based lenders shun IT exporters
The next stop on your funding search might be small, asset-based lenders. Dan Drechsel, chief executive officer of AdvancedAR Funding, says his company provides business credit lines to companies, using their accounts receivable, or unpaid invoices, as collateral. Few in his industry finance IT exporters, he says. "They are predominantly focused on domestic sellers and industries other than IT," Drechsel says. "The few [that] are able to get comfortable with IT exposures simply will not offer export factoring with advances, due to the practical hurdles of collecting from overseas customers and the legal ownership issues that arise during transportation of the goods." Use such alternative funding sources sparingly because of their high costs, Iannone warns. "Even though—right now—their interest rates may look attractive at 8 or 9 percent, it's still exorbitantly above-market for cost of capital and it's variable. So as interest rates go back up, you'll be tied to an undue anchor in the race to compete," he says. If your business plan calls for expansion into new territories, clients, or verticals—areas with potential for large growth, but slower return on investment—private equity funding with a longer time horizon might match up well to your needs, Iannone says. Using money you borrow against your accounts receivables for long-term growth would not be the right match because you won't get the money back fast enough to repay on time. "One cycle is 90 days, while the other might be five years," he says. What's important is to find the right funding for your needs, Iannone says, and to consider all your options.