The Alternative to Banks: Financing a Business in 2012-2013

Posted by Jonah Schnel on Wed, Sep 19, 2012

financeIt’s hard to believe we’re already almost through 2012! This year has flown by and thus far, 2012 seems to have been a year where small businesses have been stabilizing a bit. I say “a bit” because all the business owners I talk to still want and need additional capital to manage or grow their businesses. Many of them talk to me about alternatives to banks and financing a business because they know it is the field in which I work every day. Lucky me?!?!

Let’s face it, it’s not simple or quick to get a bank loan, even if you qualify. Sometimes it feels impossible to find a reasonably quick solution for financing a business … but it’s not! I have three solutions to recommend for company owners looking to solve their need for cash. In no particular order: 

1. Find an “angel” investor

2. Borrow money from a friend or family member

3. Call an invoice factoring company

Here is a snapshot of each:

1. An “angel” investor is typically a high net worth investor that may contribute cash to your business in exchange for a small ownership position. Examples of the amount of ownership varies, but typically are 10-20% for the amount of money invested, if less than a few hundred thousand dollars. It is important to have a clear picture of where and on what you’d spend the new cash, and you should be ready to show the angel investor how they would be able to get back not only the amount they invested, but a profit on that investment within a three- to five-year time period.  

If you go down this path, PLEASE get a lawyer involved that is experienced in securities laws and talk to your company’s accountant or CPA. Many people believe a handshake is the way to do business, but when it comes to selling a piece of your company, do it formally and have it properly documented. Too many things get complicated when things go really well, or really poorly, and it’s best to do it right, up front. One final note on an angel investor: Remember, this person is now an owner of your business along with you, so treat them with respect and provide lots of communication and transparency.

2. The good old personal loan from a friend or family member can be an easy way to get fresh cash into your business, but unfortunately it can be explosive when things don’t go well. I’m not a major fan of this type of financing , so all I really want to say about this is what you’ve probably heard before. Unless you have no other options, don’t mix business with family or friends. 

3. So what is factoring? Invoice factoring or accounts receivable financing is a great way to get near-term cash for your business.  Invoice factoring is a financing tool that isn’t understood too well. The basic process is that you get an advance of cash (usually 80%) right after you’ve shipped goods or provided a service to your customer. Then, your customer pays the invoice directly to the factoring company when it comes due. The factoring company sends you a rebate of the amount between the gross invoice amount, less the amount already advanced to you (the 80%), less the fees. Our company, Fast A/R Funding, specializes in this kind of small business financing.  

I wish everyone a great finish to 2012 and an exciting 2013! Financing a business is done many ways, so choose carefully, do your due diligence and always work with partners that have integrity and transparency.

Learn more about factoring and Fast A/R Funding’s services by downloading our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants. 

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Tags: Cash Flow, Business Loans