Introduction. Field guides help people learn about and identify different varieties of plant and animal wildlife. This financial field guide can help you sort through the many financing alternatives available for small business.
Available Financing Options. The main financing tools in alphabetical order are:
Asset-Based Lending (ABL). A line of credit from a bank or finance company in the form of a revolving line of credit tied to the amount of eligible assets, including accounts receivable, inventory and equipment. The typical size of an ABL line is from $1 million to more than $10 million. ABL loans are generally for well-established businesses that do not qualify for a traditional or SBA bank loan. Generally, the cost of an ABL line is higher than the cost of a bank loan, but less than Factoring.
Bank Loans – SBA and Traditional. Banks provide a variety of loan options to small business. Often, the loans are made under the government guaranty programs of the U.S. Small Business Administration (SBA). The SBA has a number of programs for financing real estate and equipment purchases as well as general working capital needs. The loans are secured by the assets of the business or the assets financed by the loan. The maximum amount for SBA loans is $5.5 million. The SBA Express Loan Program offers loans on a streamlined basis for up to $350,000. If a business can meet the underwriting standards, an SBA-guaranteed loan is usually the most cost-effective solution.
Cash Advances. Cash advance loans are based on borrowing against future revenues based on the sales history of the business. This is a fast-evolving financing tool for small business. The typical loan advance is unsecured and ranges from $25,000 to $1 million. The advance is usually repaid in daily withdrawals from your business bank account over a six- to twelve-month period. Because the loan is unsecured, it is usually at the upper end of the cost structure for business finance.
Community Nonprofit Lenders. Nonprofit community lenders offer loan programs for small business and startups. Community lenders can provide loans ranging from $1,000 to $1 million on favorable terms and take into account community development efforts.
Equipment Finance. Equipment leases and loans can be used to finance needed equipment. The size ranges from $5,000 to more than $5 million. If a company has spent cash in the past to acquire equipment, it may be possible to “unlock” the cash by financing the owned equipment. The cost varies with the credit of the business.
Equity & Arizona Crowdfunding Law. Historically, equity investment for small business comes from the owner, family and friends, private “angel investors” and venture capital firms. The latest development in Arizona is the new crowdfunding law that became effective on July 3, 2015. The Arizona law is the first in the nation to “go operational” using a crowdfunding approach popularized by such firms as Kickstarter (non-equity raises). Under the Arizona law, a company can raise up to $2.5 million if it has audited financial statements, or up to $1 million if it does not. Equity may be sold only to Arizona residents. For investors who are “accredited” (meet certain minimum financial tests), there is no cap on the investment amount. For investors who do not meet these tests, there is a cap on the investment of $10,000 per company. The new law provides a streamlined process, but there are requirements of the Arizona Corporation Commission that must be followed.
There are also new developments on the federal level. On June 19, 2015, the SEC implemented Regulation A+, which permits well-established businesses to raise increased amounts of equity under streamlined disclosure rules.
Equity investment is usually the most costly form of financing, and you have a “partner” in the business until the equity is bought back or the business is sold.
Export Finance. Export sales can be a great channel to grow your business. The key to export finance for small business is finding a lender that will fund sales to foreign customers. There are a number of alternatives, including bank loans, ABL loans or Factoring. There are government guarantee programs offered through the SBA and the U.S. Export Import Bank (as of this writing the charter of the ExIm Bank has lapsed and may not be renewed by Congress).
Factoring. Factoring is the cash sale of your accounts receivable at a discount so you do not have to wait for your customers to pay before you can redeploy the cash. A factoring line can range from $25,000 to more than $10 million. Finance companies usually make their credit decision based on your customer’s credit rather than your credit. Factoring can help an early-stage company as long as there are sales being generated. Only receivables from businesses or government qualify; sales to consumers do not. The cost of Factoring is higher than a bank loan or an ABL loan, but can it can be put into place quickly.
Inventory Finance. Inventory finance can cover the cost of inventory in the form of raw materials, parts or finished goods. This type of financing is usually available only to well-established businesses. It is similar to PO Finance, but does not require that the product be pre-sold. The financing can be in the range of $25,000 to more than $500,000. The cost is similar to Factoring and PO Finance.
Purchase Order Finance (PO). A specialized form of financing the cost of producing a product that is pre-sold to credit-worthy customers. PO Finance is used to pay for goods manufactured by a third party and assures the manufacturer of payment once the product is made. PO Finance can be useful to smaller companies that obtain a large volume of purchase orders. The typical size of a PO Finance transaction can range from $50,000 to more than $10 million.
Business Community Resources. There are many resources available in the business community to help small-business owners and entrepreneurs. A good starting point for more information is the In Business Magazine 2014/2015 Lending Guide. The Lending Guide lists a number of Arizona lenders, lending resources and community organizations providing counseling and mentoring. See the Guide at bitly.com/inbusiness-lendingguide
Another excellent resource is the Arizona Small Business Association (ASBA), which also offers an effective mentoring program. A listing of ASBA resources can also be found online at asba.com/?business_resources
Wishing you much success in your business!
Joel Gottesman is the owner and president of Liquid Capital of Arizona, specializing in alternative finance, including ABL, factoring, export, inventory and PO finance. Joel has also been a successful attorney, banker and small-business owner.
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