Small Business Funding: Thinking Outside of the Box

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If you ask a dozen so called economy experts to opine on whether the economy is improving or declining, you are likely to get a 50/50 split. As with many such intangibles, there is probably no accurate answer to the question.

One thing we know for certain is that when there is a downturn in the economy, the small business community is invariably the hardest hit and suffers the most through any downturn. When we realize that the small business area of the economy is the only real job creator, the situation becomes even more baffling – why wouldn’t there be more help and stimulus for small business when it returns so much to the economy? That’s another question for which there seems to be no ready-made answer.

As a small business grows it always needs more capital, and as that capital is added the small business grows and again needs more capital. It is a never-ending upward spiral. However, it is that growth capital that is so elusive in these difficult economic times. Many entrepreneurs have found the ‘closed’ sign on the door at their bank when they were seeking out some conventional funding for their expansion plans. Historically banks have been the capital provider for business at all levels.

If the banks are ‘closed’ does that mean no growth? We think not as there are alternatives in the secondary finance marketplace. Unfortunately for many entrepreneurs the secondary market is either little known or rarely explored. There are however many options that small business owners should explore if their bank has not been able to service their immediate needs.

Virtually all small businesses have some assets, and it is often these assets that can form the basis for an ‘outside the box’ opportunity. In many cases these facilities prove to be even more flexible than a bank loan as they often grow with the expansion of the company.

Just what are these options? There are several, and some can be tailored to the specific needs of the individual user company. In the area of imports for example, a small business wishing to import goods would often be required to establish a letter of credit. The normal process would be to approach one’s bank, and they would open the facility and use the assets of the company as the required security or margin. Those facilities are now hard to find for many small businesses. When this happens, they need to turn to specialist export finance companies that have developed many creative ways to assist with imports without necessarily tying up the entire asset base of the importer.

Alongside this type of finance is that of purchase order finance. There is probably nothing as frustrating for small business owners than winning a major order from a substantial customer, only to have to decline the order as the company lacks the ability to finance either the import or manufacture of the goods. Once again there are a number of specialist purchase order finance entities that can create a facility based on the value of the order and the subsequent receivable.

These approaches represent the ability to finance a future order and sale, and the creative methods that already exist outside of the banking arena.

There are also similarly creative methods to work with assets already created by small business owners. This could be in the form of equipment or real estate. If such assets exist, then they form the basis of a medium to long-term funding solution. This could come in the form of an asset based loan, mortgage, or a sale and lease back of equipment or rolling stock. Again, it is a case of using assets already on ‘the books’ and unlocking the availability of credit that they represent.

Also, in this category there is the ability to unlock capital locked up in accounts receivable. The majority of business owners know only too well the frustration of selling a product or service, and then having to wait anywhere from 30 to 90 days before payment is received. This can be a damaging drain on a supplier’s cash flow. The solution lays in two ‘out of the box’ options.

The first would be the fairly well known approach in the form of factoring. In basic terms this is the practice of using accounts receivable as collateral for a revolving line of credit. Not only does this create cash flow, but because the credit facility is geared to receivables, as they increase with company growth so does the credit facility. Many factoring companies offer this service, which also incorporates a full accounts receivable administration facility thus relieving the client company of the day-to-day needs for maintaining a credit and collection department. Factoring has a long history of helping small and medium-sized business achieve their full growth potential. They essentially just unlock capital that the small business already has to provide the framework for growth.

Of a similar style is a lesser known cash flow accelerator called invoice discounting. It is similar to factoring in that it works with accounts receivable to provide the funding base. It is also similar in that it focuses on unlocking capital tied up in receivables. The difference is that invoice discounting basically represents a buy-sell transaction for a single invoice or batch of invoices. While factoring, on the other hand, focuses on a total portfolio management approach.

Invoice discounters are able to offer custom-made programs that are geared to a ‘use-it-when-needed’ basis. In other words, the client company can elect to turn one or more receivables into instant cash through discounting as their individual need arises. Because the facility is structured as a buy-sell arrangement there is no ‘loan’ and, as such, nothing to repay at a later date. Settlement of the invoice at the end of the credit period by the client’s customer completes the transaction. This is also usually an ‘off balance sheet’ form of financing and, therefore, does not impact on the client’s credit standing.

Accessing capital is the key to growth and job creation for most small businesses. When a company already has that capital in one form or another it just becomes a case of finding the right vehicle that will unlock the capital and turn it into instant working capital. There are many facilities outside of the banking area that provide just such an option.

Small business owners should always remember that when their bank says ‘no,’ or ‘no more,’ that is not necessarily the end of the search. Looking outside of the box and into the secondary financing market can often provide solutions that will create growth and job creation.

David Banfield is the President of The Interface Financial Group, a position that he has held for over 20 years. He has been instrumental in starting Interface as a franchise opportunity and building it to its current international status. Prior to his involvement with Interface, he worked extensively in the banking, credit and factoring financial service areas.

For more information:

Website: www.interfacefinancial.com