Online Extra: When Your Bank Says No
If you're a fast-growing company looking to raise money to expand, you may find yourself squeezed out of the tight credit markets. If you've tried -- and failed -- with your current bank, the local community bank, and nonbank lenders, then it might be time to consider these options:
RECEIVABLES FINANCING/FACTORING: Popular among companies with large invoices, factoring allows you to sell accounts receivables to a factorer for a cash advance. "This is really an opportune time to factor," says Scott McArron, president of Dallas-based Evergreen Funding Corporation, a company that provides accounts-receivables financing to small and midsize companies. "With the economy slowing, banks are curtailing lending and, when they do that, small business is always the first to get hurt."
Factoring allows you to leverage your large invoices to gain immediate access to cash. "If you have $100,000 in equity but are a rapidly growing company, you may have $700,000 in receivables that you can't tap from a traditional lender," McArron says. "Fast growth creates an inordinate need for working capital. If you're growing fast though, your receivables base is growing faster than your cash flow and, until growth levels off, you can never catch up." Typically, a factorer will advance between 50% and 80% of the amount of the invoice.
ADVANTAGES: You'll receive the cash within 48 hours, and you're not limited by your balance sheet. As long as you have receivables from reliable and well-financed customers, you can usually raise the cash. Factoring companies will sometimes manage your receivables and collect on them for a fee.
THE DOWNSIDE: It will cost you. Factoring is a lot more expensive than a traditional bank line of credit. Most factorers will charge the prime rate plus 2%, and that's in addition to a fee that ranges between 1% and 3% of the amount involved. Depending on your credit-worthiness, the fee can go as high as 8%.
INVENTORY FINANCING: If you have a warehouse full of unsold inventory and are strapped for cash, you can put that stock to work for you. Financing your inventory works in the same way as financing your receivables, except you typically get between 30% and 50% of your inventory as a cash advance.
"There's a huge amount of flexibility with inventory financing," says Bill Schweiger, CEO of AMCI Finance, a Spokane (Wash.)-based financing company specializing in small-business options. "We can do deals that make sense for the company because we are not constrained to do only deals that fit specific criteria banks have to work under."
ADVANTAGES: Inventory financiers won't scrutinize your financials. They'll base their decision solely on the value of the inventory itself. The more inventory you hold, the more cash to which you have access. Another plus: The application process is simple, so you won't have a long wait for approval.
DOWNSIDE: It's expensive, typically costing the prime rate plus 3% or 4%. Also, if you sell the inventory, you'll have to pay down the loan immediately.
EQUIPMENT LEASING: Over the last few years, small businesses have increasingly turned to leasing as the most effective way to finance the purchase of equipment. Small-ticket leases, those ranging from $20,000 to $200,000, have been growing at an annual rate of 21% over the past four years, according to the Equipment Leasing Association, which represents 600 leasing companies. "The attractiveness of leasing is very strong because it meets the basic needs of the cash-constrained," says Michael Fleming, president of the association.
ADVANTAGES: You have a better chance of being approved for a lease than for a conventional bank loan. That's because lessors know that borrowers tend to make lease payments more rapidly than general credit payments during difficult times since the leased equipment is usually vital to their businesses. The cost of an operating lease is tax-deductible, too. Flexibility is another bonus, as you can craft your agreement to include upgrades or add-ons and maintenance.
THE DOWNSIDE: You don't own the equipment, so it's not part of your asset base.
By Naween A. Mangi