Alternative financing vs. venture capital
Alternative Financing Solutions
But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:
1. Full-Service Factoring — Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.
2. Accounts Receivable (A/R) Financing — A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.
3. Asset-Based Lending (ABL) — This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.
In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:
- It’s easy to determine the exact cost of financing and obtain an increase.
- Professional collateral management can be included depending on the facility type and the lender.
- Real-time, online interactive reporting is often available.
- It may provide the business with access to more capital.
- It’s flexible — financing ebbs and flows with the business’ needs.
It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches — these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.