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Last month’s article
mentioned the contraction in credit card limits and the
resulting need to ensure that you have access to other
sources of credit. Putting a great big exclamation point on
the magnitude of the contraction in credit card limits, a
recent article in Barron’s reported the biggest-ever drop
on record in consumer credit in the third quarter of
2009.
This was the 10th straight
month of contraction yet the rate of contraction accelerated
(a very concerning trend). Evidently, consumer credit
contracted by 8.5% (or $17.5 billion – WAY more than the
$5 billion contraction expected!). The vast bulk of that
came in the form of reduced revolving credit lines, mostly
credit cards, which dropped 18.5%.
Make no mistake, you can no
longer rely on your business or personal credit cards as a
key source of financing – you must have alternative
sources of credit in place should your limits be cut or
eliminated. Let’s take a look at some of the various
sources and types of financing available to small
businesses. For the purpose of this article, I will not
discuss angel and venture capital or any other source that
requires an “exit” event and expects exceptionally high
returns on investment. If you need information or advice on
those types of capital sources, let me know.
For the average business
looking for capital, here are some of the more important
sources to consider:
• Government (federal,
state and local): The government provides a wide array of
financial support to small businesses – especially during
economic downturns such as today if you can show that the
funding will help to keep or create jobs. The government
also provides guarantees that can help you get loans or
bonding as well as other incentives and credits for business
investment, workforce training, etc. Typically, the amounts
are on the smaller end and are designed to help a business
rather than be its sole source of capital.
• Quasi-governmental
entities (e.g., MassDevelopment): Depending on the mission
of the entity, it may provide equity, debt, tax incentives,
access to public bond offerings, and/or guarantees. The
amounts they will lend or invest can be large or small
depending on the size of the entity and the use of the
proceeds.
• Banks (national,
regional, & local banks, investment banks, and credit
unions): Depending on the size and sophistication of the
bank, it may provide just simple residential loans and
HELOCs or it may provide the entire gamut of credit products
including large commercial real estate loans, financing for
acquisitions and equipment purchases, long-term syndicated
term loans, trade financing, asset based loans, etc. The
amounts can range from very small to very large.
• Commercial finance
companies (e.g., CIT or GE Capital): Commercial finance
companies range in size from small shops to massive national
corporations and provide almost all of the credit products
and services provided by the big national banks and
investment banks. Again, the amounts can range from very
small to very large. • Factoring companies: A factor
doesn’t loan you money, he buys your accounts receivable
from you for 75-80% of the face value. If the factor
collects the more than the 75-80% he paid to you upfront, he
will give you the excess collected less the his fee
(typically in the 1-5% range depending on the quality of the
A/R and how long it takes to collect). For instance, if you
sell a $1,000 receivable to the factor he would give you
$800 up front. Let’s assume the factor eventually collects
$900 and has to write off $100. In that case he would
forward you an additional $80, which is equal to the excess
$100 ($900 collected less the $800 already paid to you)
minus his fee of $20 (we are assuming 2% of the original
$1,000 A/R sold to the factor).
• Vendors & strategic
alliances: Vendors will often provide you credit to purchase
their products and services if you can establish a record of
timely payment or otherwise demonstrate the creditworthiness
of your company. However, there are times when your vendor
(especially if it is a large company) may consider providing
you with a longer term loan or even an equity investment.
For instance, if you are trying to expand into a new
territory where your vendor doesn’t have a great customer
then the vendor may be willing to help you finance your
expansion of territory. Alternatively, if you are unable to
pay your bills and might have to close shop then your vendor
might be willing to work with you to ensure you stay in
business.
• Business development
corporations (e.g., MA BDC): In 1980, the U.S. Congress
created a class of corporation called business development
corporations to encourage the flow of public equity capital
to private businesses. A BDC must invest at least 70% of its
assets in private U.S. corporations. BDCs must also make
available significant managerial assistance to their client
companies. BDCs often, but not always, take an equity
interest in their client companies.
Story
continues below ↓
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