Among all the issues that require a business owner’s endless vigilance, proper financing stands out as among the most critically important. In the absence of a strategic financing plan, businesses can face multiple challenges with cash flow and the ability to access needed funds for operational and capital expenditures. While traditional bank financing is usually the preferred approach, alternative financing can play a vital role in addressing the needs of companies in a variety of scenarios.
What is alternative financing? This article will address various aspects of this approach and its favorable impact on business operations.
Alternative financing, by its very definition, is financing available through non-bank sources. In those instances where traditional bank financing is not available or is limited, alternative financing can fill the void as a surrogate, or can supplement bank financing. For instance, a business that needs an accelerated cash flow may consider invoice financing, which would allow a business owner to borrow against outstanding invoices. Other alternative financing options include equipment acquisition, leasing and sale-leaseback, asset-based loans, inventory loans, term loans and owner-occupied real estate loans.
As with other strategic business initiatives, business owners are well served by proactively assessing their financing needs in the context of their overall business plan. Issues to be addressed include analyzing current cash flow in light of operational requirements and capital expenditures for future growth (i.e., equipment, facilities etc.). All too often, seeking financing is deferred or delayed, and then attempted under duress. This can exacerbate a problem when timing is an issue and can affect the decision-making process when selecting the appropriate financing option.
As a general statement, the cost of alternative financing is typically higher than bank financing. This is due to the cost of capital, risk profile of the transaction, as well as due diligence and underwriting costs. The costs should be viewed in the context of what benefits are derived from using alternative financing. Here’s a checklist to consider:
- What is the cost of financing in contrast with the gross margins generated on a sale?
- If I’m financially equipped to complete a transaction or sale, I can demonstrate performance and capacity.
- If I can’t complete a transaction or sale, it could likely preclude future opportunities with a customer as well as generate no revenue.
- Without the needed financing, will the company become operationally impaired?
- Will the financing provide the needed resources to grow the company?
Using alternative financing should not be viewed as an either/or proposition as it relates to traditional bank financing. In working with banks and their commercial lenders for many years, I have teamed up with the bank to develop financing strategies that allow them to secure a new business customer or to address the needs of a current customer. In many instances, alternative financing is a stepping stone to traditional financing. From a planning perspective, developing an overall financing structure can entail a variety of products and strategies to create a logical and viable solution.
A key element of working with an alternative lender, is the quality and depth of the working relationship. It underpins all the related interactions. It begins with open and honest discussions regarding the company and its needs, challenges, opportunities and goals. Clear and consistent communications combined with responsiveness allow the parties to strategize, plan and develop a course of action. It promotes efficiency and the ability to deal with nuances and functional issues in real time.
In today’s business world, you must adopt a broad-based approach to financing for your business. A proactive, strategic plan that considers traditional and alternative options provides an informed perspective that can address the myriad of scenarios that business owners face. Armed with this information, fact-based decisions can be made that can provide the optimal financial results desired by a business owner.