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Business Finance in a Recession- Part 3: Business Funding Alternatives

November 2, 2009 by Frank Goley, Business Consultant

Date:  November 1, 2009

Author:  ABC Business Consulting, Chief Business Consultant

Subject:  Business Finance in a Recession- Part 3:  Business Funding Alternatives

In the previous two blogs on Business Finance, I explored two principal means of funding a company during a Recession:  Small, Community Bank Finance and Bootstrapping.  Let’s look at some more real-world, what is working right now finance alternatives for your Business.

Strategic Relationship Finance

Who would ever think to go to Whole Foods Market for business Finance?  Well, Mr. Korson and Rogers did and received a Local Producer Loan (www.wholefoodsmarket.com/values/local-loans-apply.php) , as documented by Sara Wilson of Entrepreneur Magazine (May 2009, “Loans for Local Producers”).  Even though the finance offered is typically for existing companies, the owners of Coracao Confections were able to secure start-up finance.  This seed finance was critical as the entrepreneurs were declined finance by friends, family, banks, community based lenders and angel investors.  A $20,000 seed loan was secured, with projected year-end sales at $200,000.  Not bad! 

What was one of the keys for their success in securing finance through Whole Foods?  Building a relationship of Trust and being Honest and dependable.  In tough finance environments, it mostly boils down to relationships and the strength of the relationships.  Look for and explore industry specific Strategic Relationships which you can parlay into funding.  For more information on Strategic Alliances, Strategic Relationship Finance and Joint Venture Finance, as well as, Vendor and Supplier Funding, among other Finance Strategies and Sources for your Business, please see the ABC Articles on Business Finance. 

The Receivables Exchange 

www.receivableexchange.com

You can sell your Account Receivables online in an Auction Based Environment if you have more than $1.5 million in yearly sales.  Receivables finance and factoring can be expensive, but as bootstrapping, short-term finance instrument, it can be just the ticket.  It is flexible and quick, something growing companies often require. 

Our Business Finance article goes more in-depth about Receivables Finance and Factoring.  Check out Factoring Associations for a long list of Invoice and Receivables funders. 

Reference:  “A Bright Spot in the Credit Crunch”, Inc. Magazine, April 2009. 

Also see:  www.inc.com/keyword/apr09.

On Deck Capital:

Non-bank lender backed by Venture Capital Firms and a Hedge Fund.  Loans are based on a Company’s Cash Flow instead of assets or credit score.  On Deck analyzes the last 6 months of a Company’s Sales history and banking statements.  Makes a loan decision in two days.

Requirements:

Been in Business more than one year.

Bringing in at least $3000 in credit card sales per month, or if don’t accept credit cards, been in business at least two years with an average daily bank balance of at least $3000. 

Loan Details:

Small size:  average of $30,000.

Repay in a year.Interest rates of 18-36%.

Origination Fee of 1-2%.

$25 Processing Fee.

$50 penalty for late payment.

Advantages: 

Expensive rates, yet still less costly than a Merchant Cash Advance, which can charge as much as 100% interest.Automatic daily deductions from a bank account to make loan payments allow businesses to better budget. 

Disadvantages:

High interest rates and costs.

Ties up business capital with the daily payment deductions.Good Fit:This type of loan is a good fit as an alternative to Merchant Credit Card Advances, for short term liquidity and until you qualify for more competitive finance.  Another advantage to this type of business finance is it keeps you focused on the most important Business financial:  Cash Flow! Reference:  Inc. Magazine, May 2009, “Loans You Pay Every Day” by Ryan McCarthy.

Microloans

Micro loans can be a great place to secure seed finance and to find the right Angel Investor.  www.Kiva.org  started out as an international micro lender but now is adding U.S. businesses to its loan recipients.  Kiva raises about $1 million per week, mainly from tiny $25 loans.  Lenders have experienced a 98% payback rate- wow that is impressive!  Now someone, in say India, can lend money to an entrepreneur in the

U.S.  Here are some stats on Kiva:

Average funding time:  56 hours

Loan frequency:  every 31 seconds

What I like about Kiva is the bringing together of small angel investors, with a social media type networking platform.  This form of Micro lending is sure to grow exponentially, as will Micro lending as an Industry.  Take some time to learn more about Micro lending- you may find it a great fit.   

Reference:  Entrepreneur Magazine, July 2009, “Sharing the Micro Wealth” by Jennie Dorris.

Note:  This article has a great step by step breakdown on how Kiva loans work.

Dealing with Investors

Since I have mentioned Angel Investors a couple times in this blog, it would be a good time to provide some advice on securing an Angel.  Below are some tips from Entrepreneur Magazine’s Tom Nawrocki (June 2009, “Dos and Don’ts of Getting an Investor”) when looking for an Investor.  Also, we have extensive information on Business Investment and Angel Investors in ABC’s Finance Articles.   

Do’s:

Build a personal repoire.

Get referrals from Accountants and Attorneys.

Check out an Investor through a business that has received investment from the Angel. 

Have a solid follow on finance/ funding strategy so the Angel’s risk is reduced.

Ask employees to invest.

Don’ts: 

Unrealistic financial projections.

Don’t worry about being small; most Angel Investors fund companies worth less than $1 million.

Fail to show your equity capital invested in your business.

Don’t assume an Investor will be an Advisor.

A choice you will have to make is to secure an Angel Investor that will also serve as an Advisor to your business or just an investment vehicle.  In my opinion, bringing in an Angel Investor who has valuable experience in your business, industry or niche is a must, but understand, this type of Angel will demand more equity.  Also understand that “uninterested” investors can become time consuming to manage, potentially distracting you from the main goal of growing your business. 

Combining Bootstrap Finance with Angel Investment can be a great combination to successfully grow a company.We are interested in hearing from you! 

Your Feedback is welcome!

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