Financing a new business or one that is experiencing sporadic or rapid growth can be difficult if you aren’t aware of the options available. It often takes a mix of many types of financing including: family money, refinancing property, asset based options and equity financing to provide the start-up and growth capital for new businesses.
Below is a quick overview of three types of alternative financing and how they work. On the next blog we’ll cover a few more. At the end of this series of blogs you’ll have more details on each type of financing method. This will help you be more informed when you’re looking to finance your business.
1. Factoring takes the receivables or invoices outstanding and converts them to cash so it can be put back into the business. As the receivables pay, the line opens up and more invoices can be converted. The gross amount of an invoice is worth 85-90% in cash paid within one day of submitting the invoice and proof of delivery. The cost is based on volume and time outstanding. When the invoice pays the fee is taken and the reserve (10-15%) or the difference is refunded. No partners, no house for security and flexible terms. This is an asset purchase and no debt shows on the balance sheet.
2. Asset based Lending is generally for the companies one step away from getting bank financing. If companies possess assets that include invoicing, equipment and inventory they may utilize these assets to obtain an asset based line of credit. This is very similar to the lines of credit you would see at the bank but for companies requiring more capital than a traditional line of credit provides. Profitabilty is not essential to qualify for this type of financing. Contract terms are required.
3. Sale Lease-Back or Lease Buy-back is an option for companies that have larger assets like machinery or vehicles, possibly a fleet. They are looking to increase the cash flow in the business by selling off the assets they have to a lender who will lease them back to the borrower. This increases cash flow and still allows a company to use the equipment to run the company.