Small business owners are used to ‘Mission Impossible’ tasks, but these days getting a loan from the bank manager appears to be one that stymies even the most persuasive entrepreneurs.
This is typically the point when most observers start the ‘bank bashing’ with particular focus on the ‘Big Four’. My take on this, however, is that you can’t really blame the banks for not funding small business because it’s not in their ‘DNA’. Banks are good at providing money when security (i.e. collateral) is available — but, if you need a financier to really understand your business and to decide whether you are credit-worthy, then the banks are just too big and centralised to help.
With that in mind, below are five alternative funding options that might help you make the most of your 2010 business plans.
Some from the banks (if you can get it) and a few from the non-bank alternatives.
The family home
Many of us can essentially fund our business investment by redrawing the equity in our homes. It should be noted, however, that banks are getting tougher in this area as well, with some banks reducing the loan-to-value ratio to 60 percent (versus more than 75 percent before the global financial crisis).
These, of course, carry higher interest rates (usually between 12 to 20 percent per annum) but can be a great stop-gap measure, although you cannot put the company payroll on your Amex!
The overdraft essentially allows you to spend more than the cash balance in your account and the excess becomes a loan repayable to the bank. As with all forms of bank financing, these are becoming more difficult to obtain.
Receivables financing essentially allows you to use your Accounts Receivable (invoices) as the collateral against which a loan can be extended. One drawback can be that most providers will ‘lock in’ the small business to a one to two year contract.
Select Invoice Discounting (or spot factoring)
This service is also part of the Receivables Financing family, but differs markedly in terms of flexibility. You can select certain invoices to sell to an Invoice Discounting company, as opposed to taking a loan. You only pay when you use the service.
David Hechter is a financial services expert who has held various senior roles in banking and asset management. He is currently a Director of Invoice Discounting firm, Interface Financial Group.