5 Alternate Ways to Find Capital

The state of the global economy has improved relative to a year ago, but with lingering uncertainty and with consumer confidence still susceptible to swings, many small and midsize companies continue to find it challenging to find capital. While U.S. Census Bureau reports indicate that, for March through May 2010, both the retail and food service industries experienced an 8.1% jump in total sales from the same period a year ago, sales dipped 1.2% in May.¹ Such swings can be particularly tough on small businesses, making additional capital crucial — yet competitive — to get. Still, entrepreneurs who show persistence and creativity may find ways to obtain the financing they need. Though not every type of lending is right for all businesses, there are plenty of alternatives to explore. Here are five ways that companies may access the cash they need to grow or transition or simply to cover expenses until the markets rebound.

Consider using your assets. As lines of credit have tightened, asset-based lending — loans secured by inventory, accounts receivable, equipment and the like — has increased in popularity. Although the number of new asset-based loans recently dropped slightly (by 2.1%) in the first quarter 2010 over the end of last year, this shift comes on the heels of a 29% increase in the third quarter of 2009, according to the Commercial Finance Association.

"Using assets to secure loans has become a much more mainstream approach," says Marilyn Landis, president and CEO of small business consultancy Basic Business Concepts, in Pittsburgh. She notes that lenders are willing to consider a long list of assets and flexible formats. For example, a lender might front 85% of a total line of credit against eligible receivables.

Using another tool, called factoring, you can sell receivables outright to a company that will assume the risk of collections and immediately pay you between 70% and 95% of the face value of the invoices, then forward the remaining amount after your customers pay in full. In exchange for taking that risk, lenders typically receive one or two points over prime. "The pricing is usually commensurate with the risk," says Landis, noting that asset-based lending is often pricier than traditional credit. "But if you can't get a loan and the alternative is your credit card, which just jumped to a higher interest rate, asset-based loans may make sense."

Above all, be certain you're comfortable with the level of risk this type of loan involves. If you're unable to make payments for any reason, you could be in jeopardy of losing the assets that you used to back the loan.

Explore angel investing. For companies past the startup phase but not yet ripe for venture capital, angel investors can provide a lifeline in exchange for a relatively small ownership stake in your business. Start by looking for investors close to home who have a particular interest in your industry or sector and will have greater patience for growth. You may want to ask your attorney and accountant whether they know of any angel investors, and check with your nearest Small Business Development Center to find a local angel group. "This is a particularly good time to seek new investors," says Rob Snead, senior vice president, Bank of America. "A lot of people displaced in this job environment are basically looking to partner." An individual investor is also a good alternative to a venture capitalist, since the latter will be more focused on fast growth and will take a larger piece of future profits.

Reach out to peers. Many communities also have regional lending clubs that are sometimes affiliated with local business associations. These clubs are somewhat similar to angel investing groups and are designed to support worthy small businesses in the area by pooling their resources to provide them with small loans. But, if your community doesn't have one, you still have options. The peer-to-peer lending concept has also made its way to the Internet. A recent Gartner Group study² forecasts that the burgeoning online peer-to-peer lending space will grow to $5 billion by 2013. These online marketplaces allow entrepreneurs to search for lenders and borrow as much as $25,000, with three-year terms and rates ranging widely, from 7% to 35%. A borrower with a high credit rating, for example, can get a 7.93% APR, compared with the 12.33-percent national average.³

Try the SBA. The U.S. Small Business Administration's loan programs make it easier for traditional lenders to take risks on small companies by guaranteeing the loans and thus lowering the lender's risks. Through May 2010, SBA-backed lending had increased 90% over the previous eight months, an increase largely attributable to stimulus funding from the American Recovery and Reinvestment Act of 2009.⁴ For companies needing capital to purchase real estate or equipment, the SBA's CDC/504 program provides long-term fixed-rate financing to acquire fixed assets, and is usually available faster than other SBA loans. "It's a great product, even in healthy times, that provides up to 90% of the value of the asset," says Kathleen Sowa, Business Credit Executive, Bank of America Merrill Lynch, noting that Bank of America has been the No. 1 504 lender in the U.S. for the past two years.

If your business is relatively new and its credit history therefore brief, consider applying for an SBA-backed loan, which can be obtained through a microlender, such as a Community Development Financial Institution (CDFI). Traditional lenders help provide capital to CDFIs, which can then offer loans to applicants with a riskier profile. For example, Bank of America's current commitment to CDFIs is $1 billion.

Look inward. Taking on more debt may only make matters worse if inefficient business practices are leaking money. "Many companies can find cash by really looking hard at internal operations," says Landis. Business owners can boost profit margins by cutting out fat, putting more efficient machinery on the production line and reducing the cost per widget by even a few pennies, which eventually adds up. It's also a good time to analyze your customer list and see which have struggled postrecession, while identifying adjacent and potentially lucrative markets to move into. As Landis says: "The best companies are reinventing themselves now."

To be sure, companies with a proven concept, a plan for growth and the drive to make it can use the same business sense and ingenuity to locate critical capital. With the experience of surviving the economic trials of the past couple years and the guidance of a financial professional, resourceful companies are well poised to find a way to get funding and keep their companies on the right path to achieving their goals.