These are unprecedented times and all levels of government have responded by becoming active in funding small businesses, everything from emergency funds and grants to government guaranteed loans that are done within days. It confirms how important small businesses are to our nation’s overall welfare. Business owners should take advantage of everything that is being offered but should not borrow more than they need, and they should have a plan to pay it back.
The more things change the more they stay the same, and that applies to business finance today. There are still only two financing options available to business owners: debt or equity. I like to think there is a third option: make a sale, get paid, do it again and keep some money in the business. Most business owners do not like me to mention that one.
Debt lenders like to think they are either a cashflow lender or an asset-based lender and some are one way and some the other, but most are both. Consistent profits over an extended period will open doors to a much larger range of lenders and sometimes better rates. This is where an understanding of short-term versus long-term financing is important.
Love money is a common funding option, especially for newer businesses, but I have seen too many examples of personal relationships being harmed by it. Supplier credit is a much better source of working capital and comes without interest, collateral, personal guarantees, liens, or equity dilution. Thanksgiving should remain a happy event like it was intended to be!
Asset-based lending has been the primary source of business financing since business began, and there are just as many lenders as there are assets. Each one is an expert in the asset they lend against and can therefore offer the maximum leverage. Done right, each ABL lender has a vested interest in the success of the business and becomes what could be called a non-equity partner.
A purchase order has value to a PO finance company and accounts receivable has value to a Factor. Cash advance lenders value nearly any credit worthy business owner with six months of steady deposits and no NSFs. Inventory is always a challenging asset to finance, but equipment and real estate are easy.
Equity lenders are aggressive because the high returns allow them to play nearly every hand. Owners of these “high-tech” businesses should investigate asset-based lending and use it whenever possible. Equity deals can happen quickly, and business owners can get left in the dust without control and little ownership of the business they worked so hard to create.
No matter how hard business owners search the internet, they will always end up with one of the options mentioned here. Their decisions may determine the success or failure of their business, and some are irreversible. All we can do as business finance professionals is to make them aware of all the options and save them time, effort, and perhaps even grief.
