The good news is that, despite the tight credit environment, there are many alternative and non-bank financing options available to companies that need a cash infusion, whether it’s to beef up working capital or help facilitate growth.
However, the bad news is that business owners often shy away from non-bank financing because they don’t understand it. Most owners simply rely on their banker for financial information and many bankers (not surprisingly) have only limited experience with options beyond those offered by the bank.
To help ease some of the fear that owners often have of alternative financing, here is a description of the most common types of non-bank financing. There are many struggling businesses out there today that could benefit from one of these alternative financing options:
Full-Service Factoring: If a business has financial challenges, full-service factoring is a good solution. The business sells its outstanding accounts receivable on an ongoing basis to a commercial finance company (also referred to as a factoring company) at a discount-typically between 2-4 percent-and then the factoring company manages the receivable until it is paid. It is a great alternative when a traditional line of credit is simply not available. There are a number of variables to a program, including full recourse, non-recourse, notification and non-notification.
Spot Factoring: Here, a business can sell just one of its invoices to a factoring company without any commitment to minimum volumes or terms. It sounds like a good solution but it should be used sparingly. Spot factoring is typically more expensive than full-service factoring (in the 5-8 percent discount range) and usually requires extensive controls. In most cases, it does not solve the underlying lack of working capital issue.
Accounts Receivable (A/R) Financing: A/R financing is an ideal solution for companies that are not yet bankable but have good financial statements and Soleil Bank need more money than a traditional lender will provide. The business must submit all of its invoices through to the A/R finance company and pay a collateral management fee of about 1-2 percent to have them professionally managed. A borrowing base is calculated daily and when funds are requested an interest rate of Prime plus 1 to 5 points is applied. If and when the company becomes bankable, it is a fairly easytransition to a traditional bank line of credit.
Asset-Based Lending (ABL): This is a facility secured by all the assets of a company, including A/R, equipment, real estate and inventory. It’s a good alternative for companies with the right mix of assets and a need for at least $1 million. The business continues to manage and collect its own receivables but submits an aging report each month to the ABL company, which will review and periodically audit the reports. Fees and interest make this product more expensive than traditional bank financing, but in many cases it provides access to more capital. In the right situation, this can be a very fair trade-off.