Here's some great alternatives to get monet for your business.
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Asset-Based Lending
HOW IT WORKS Companies sell their receivables, or
invoices, to a factoring company, which gives the companies 80 to 90
percent of the value upfront and the rest when the invoices are paid
off. Some lenders offer loans based on a company’s purchase orders,
contracts or inventory.
WHO USES IT Business-to-business companies that cannot
wait for payment and especially troubled companies, because an invoice
factor depends on the client’s ability to pay, not the borrower’s
solvency. Purchase-order, contract and inventory loans require more
creditworthiness from the borrower. “If you’re in the office supplies
business and you get an order from Staples, you can use purchase-order
financing, and it can level the playing field,” said Neil Seiden,
managing director of
Asset Enhancement Solutions, a financial adviser in Port Washington, N.Y.
COST Purchase-order financing costs 4 to 5 percent
monthly, while the effective annual interest rate charged by factorers
is usually 18 to 30 percent, said Mr. Walsleben, who is also a co-owner
of
the Hamilton Group, a factoring company.
Lease-Back
HOW IT WORKS A company sells its real estate or equipment for cash and simultaneously leases it back.
WHO USES IT Healthy companies with warehouses,
manufacturing locations or other properties that hold value that could
be put to use elsewhere. The borrower sells at market value, usually the
average of several appraisals, and leases the property back at the
market rate for 10 to 25 years.
COST The lease-back adds a monthly lease payment where
previously there was none. Companies get less value from equipment than
real estate because, unlike real estate, equipment depreciates over
time, and lenders tend to value it at what is known as forced
liquidation value, a lowball price based on what it would fetch at
auction. Equipment lease-backs can create tax burdens as well. “If I own
a press outright for 10 years and it’s worth $1 million, but it’s on
the books for $250,000, and I sell it for $1 million, I’ll have to pay
tax on a gain of $750,000,” Mr. Walsleben said.
Cash Advances
HOW IT WORKS A business receives a lump sum from a
lender, which then takes a percentage of the business’s daily card
receipts until the loan, plus a predetermined fee, is paid.
WHO USES IT Restaurants and other retailers.
Business-to-consumer companies generally have more limited financing
options because they do not have wholesale invoices to factor or
factories to borrow against.
COST Twenty percent and up, but highly variable.
EXAMPLE When he needed money last year to cover utilities and taxes during the slow winter months, Dennis Sick, owner of the
Mohegan Manor
restaurant in Baldwinsville, N.Y., took out a $45,000 advance on credit
card receipts. The lender said he would take 13 to 18 percent of Mr.
Sick’s daily credit card sales until he had received $64,000, which
would take 12 to 15 months and give him an annual rate of 35 to 40
percent. But Mr. Sick ended up paying the $64,000 in seven months,
giving the lender an annual return of some 70 percent.
Nonbank Loans
WHO USES IT Seasonal businesses, microbusinesses and other businesses that cannot meet bank requirements.
HOW IT WORKS Lighter Capital,
a revenue-based finance company in Seattle, offers loans of $50,000 to
$500,000 to small businesses with high gross margins. The borrower pays
Lighter Capital 2 to 8 percent of its monthly revenue until the
repayment amount is reached, and usually gives the lender warrants for 1
to 5 percent of the company. The country’s 400 or so nonprofit
community development financial institutions,
on the other hand, fill the role of small community banks, lending to
microbusinesses. “Our clients are supplemental income businesses, like
cupcake trucks and Main Street businesses whose lines of credit got
called,” said Claudia Viek, chief executive of the
California Association for Micro Enterprise Opportunity, a network of California C.D.F.I.’s.
COST Lighter Capital’s chairman, Andy Sack, said the
cost of obtaining financing from his company was around 20 percent
annually. Ms. Viek said she expected California C.D.F.I.’s to make some
2,000 three- to five-year loans of up to $50,000 this year, at an
average interest rate of about 8 percent. The rates can go as high as 14
percent.
EXAMPLE “In the past, we would go to the local bank and
get loans on signature,” said Christi Riggs, 40, co-owner of Lone Star
Linen laundry service, based in Taylor, Tex. When the bank said no, Ms.
Riggs took out a loan from
On Deck Capital,
a New York-based company that analyzes business performance data — cash
flow, credit, even social media information — to review loan
applications from small businesses. Once granted, the loans, up to
$150,000, are repaid through automatic daily bank account withdrawals,
much as a merchant cash advance works. The short-term loans, typically
for three to 18 months, charge an annual rate of 18 to 36 percent, said
Noah Breslow, chief executive of On Deck. Ms. Riggs ended up paying
$27,750 on a six-month loan of $25,500, or an annual rate of about 18
percent.
SUPPLIERS Lighter Capital, On Deck Capital,
Kabbage and others. Many C.D.F.I.’s are members of the
CDFI Coalition.
Peer-to-Peer Loans
HOW IT WORKS Individual investors combine to lend money to small-business owners through online vetting platforms like
Lending Club.
WHO USES IT Small-business owners with good
credit scores who need money to expand or to buy equipment.
COST Depending on the owners’ credit ratings, annual
rates can run from less than 7 percent to more than 25 percent. The
loans are small, however, with a maximum of $35,000 at Lending Club.
EXAMPLE When Hannah Attwood wanted to raise money to
open a cloth diaper supply and cleaning service, she went to four banks.
“They just kind of laughed at me,” said Ms. Attwood, 34, founder of
Adore Diaper Service,
based in Ventura, Calif. She applied to Lending Club on a friend’s
suggestion, and within a week, 61 investors had jointly given her a
three-year, $6,000 loan at 11.36 percent. She combined the loan with an
equal amount of savings to buy industrial washers and dryers and cloth
diapers.
SUPPLIERS Lending Club and
Prosper dominate the peer-to-peer market in the United States.
