In the SCORE Small Business Success Podcast: Alternative Financing, Fred Dunayer, a SCORE mentor talks about alternative financing and the options available to small business owners.
During the podcast, Fred shares what is alternative financing, why a company would seek alternative financing and three categories of alternative financing.
What is alternative financing?
“I’ll start with asset-based lending which is where the lender provides funds secured by the borrower’s assets. Collateral could include accounts receivable, inventory, machinery, patents, trademarks or other assets where value can be determined. Alternative financing which is a little bit different from lending is where the finance company actually purchases the collateral while continuing to provide the use of these assets to the clients.”
Why would a company seek alternative financing?
"There’s all kinds of reasons that companies needs funds, the obvious is for working capital, could be to buy equipment, funding for an acquisition, merger or a leveraged buy out, perhaps debt consolidation, turnaround financing, hopefully not bankruptcy, re-organization financing, buying inventory. There could be financing needed for import-export trade or just plain growth."
Below are three types of alternative financing Fred discuses in the podcast.
"Equipment leasing is like automobile leasing. It’s very similar in concept. There are a few differences. In general, equipment leasing is where the lessor, that is the person doing the financing, purchases the equipment needed by the client for the duration of the term or even beyond. The equipment remains the property of the lessor until the borrowed funds plus interest have been repaid. Businesses will typically need to have established credit and have been in business a couple of years before a company will actually do that."
"Inventory financing is where businesses have large amounts of capital tied up in warehouses or behind the counter that the typical, classical example is automobile dealers or appliance dealers. There’s no way your local auto dealer can afford to keep 200 brand-new vehicles on his lot. You might think he does but he doesn’t. What he has is he has the inventory and it’s basically financed by the auto company. I think that’s probably your best bet for getting inventory financing from the third party."
"Factoring is basically a third-party company coming in and purchasing that invoice, giving a certain amount of cash to the company that did the selling and then collecting from the company that did the buying. An easy way to look at it is if you take credit card transactions, if you’re a merchant that takes credit cards, you’re doing factoring because what’s happening is when you sell something to somebody with a credit card, you’re going to get the money in your bank account the next day. The credit card company gets paid by the consumer 15, 30, 45 days out and the credit card company is going to charge you two and a half percent, three percent for the process and the financing."
Interested in learning more about alternative financing and how it can benefit your small business? Listen to the full Alternative Financing podcast.