Funding outside the box

Banks may have tightened up lending, but SME’s that look elsewhere can still obtain finance from alternative funding sources.

There’s no doubt that economic conditions are making life tough for small businesses, especially if they need to raise funds for expansion.

However, if getting a loan from a bank is proving difficult, there are other options for raising money.

To help with cashflow SME’s are taking to their suppliers and trying to negotiate favourable payment terms. They are also cutting back on goods and stock levels are falling. Small businesses are also trying to diversify more.

SME’s that need funds and can’t secure bank loans tend to spend up to the limit on credit cards. However, there are alternative funding sources to turn to, including debtor finance, vendor finance, leasing, inventory finance, chattel mortgages and private equity funding.

Debtor financing is also known as cashflow finance, receivables funding, invoice discounting and debt factoring. It involves having credit secured against sales invoices.

These products are quite flexible, but they can be more expensive and SME’s need to be careful of the quality of their debts.

Vendor finance is where a vendor lends money for the borrower to buy the vendor’s products or business.

Leasing is used for assets such as cars, plant & equipment, and technology. The asset is used as security. The lender retains ownership of the asset and at the end of the lease the business can buy the asset at its residual value.

With inventory financing, businesses receive finance to buy stock.

Chattel mortgages are loan agreements for the same types of assets leases are used for. However, the business has ownership of the asset.

Private equity funding involves giving up some of the ownership of the business to passive investors.

These solutions are becoming more popular with SME’s, particularly given the tightening of bank lending. In addition, most bank products require asset backing and businesses that lack bricks and mortar security need to look at alternative ways of funding.

Banks also tend to cap the amount they will lend small businesses and this can create problems.