Seven Uncommon Sources of Capital

To only use bank financing makes as much sense as only using the Yellow Pages for your advertising.   There are billions of dollars out there to use. You just need to know where to look.  Here are seven alternative ways to acquire growth capital and increase cash flow.

First, factoring
Many business owners have never heard of factoring; the few that have do not understand how to use it.  Factoring is the sale of accounts receivable to generate a more predictable and streamlined cash flow, or as a short-term financing line of credit.

Factoring does not create debt and is often referred to as “off-balance-sheet financing.”  Let’s assume XYZ Corp. has credit-worthy customers. XYZ Corp. can sell invoices to a factor; the factor will advance 70 percent to 85 percent of the face value of the invoices.  The factor then waits for payment from XYZ Corp.’s factored invoices.

When the factor receives payment, it will discount the advance plus a small fee from the total payment.  The remaining balance is then remitted back to XYZ Corp.

Depending on the credit-worthiness of the customers and invoice values, the fee can range between 2.5 percent to 5 percent per 30 days for the life of the invoice.  However, fees are negotiable in exchange for volume and term agreements.  The fee rate is not compounded annually and is often based on per diem pricing.

Any business that provides goods or services to another business or the government can use factoring.  However, not every factor is a good fit for every business.  Some industries have certain technicalities or nuances that a traditional factor is not experienced with.

Construction, over-the-road transportation, international sales, third-party payer medical and government vendors should work with a factor that specializes in their specific niche.

Purchase-order financing
Purchase-order funding is what it sounds like: funding based off a purchase order.  If a business needs money to produce a future product by a specified date, purchase-order funding may be a solution.

To qualify, a purchase order must be for hard goods, not a service.  The purchase order must have a firm purchase and/or “deliver by” date and be from a credit-worthy originator.  Consignment sale purchase orders will not be approved.  Purchase order funding sources will also require that the client use factoring to ensure payment.

Purchase-order funders will provide up to 70 percent of the purchase order value and charge a 5 percent to 8 percent fee per 30 days of the life of the purchase order.

Credit card discounts
Nearly every retail business and most commercial businesses today accept credit cards.  To provide this service to customers, a business will take a discount of 2 percent to 5 percent of the sales price to a service provider.  If a business can negotiate for even a slim reduction in service fees, the savings can be significant over an entire year.

If a new provider can not beat your current rate, you might gain additional services such as check verification, Internet payment options or fulfillment services.

Credit card receivables
One of the newest cash-flow financing methods is using your credit card receivables.  A business that accepts credit cards can receive an advance based on its monthly credit card volume.

A funding source will look at the previous six months’ credit card volume. You may be able to receive an advance for up to 125 percent of the gross monthly volume.  The repayment is then made on each swipe of a credit card at a higher discount, usually between 15 and 20 percent.  The discount rate will be determined by how large your advance, your volume and by your credit score.

Equipment leasing
Most business owners are familiar with equipment leasing and use it to acquire equipment they cannot afford or only need periodically.

If a business has exhausted all of its current assets and is still unable to obtain necessary equipment, it may be able to work with a third party to get the needed equipment.

How this works is simple; if you qualify, a third party will purchase the equipment and then lease it to you on a lease-to-own agreement.

If it’s cash you need, you may sell your equipment and have it leased back to you.  This program is considered “hard money,” and is more of a last resort than a first option.  Unless your goal is to liquidate your assets, a business owner should exhaust other options before considering this approach.

Selling bad debt
Most of us are familiar with collection agencies, but how many business owners have considered selling their bad debt?  The discount may be substantial; usually you’ll receive only pennies on the dollar.  However, the sale of your bad debt will accomplish two goals.  You will remove the bad debt from your balance sheet and you will acquire working capital from a non-performing asset.

Retail installment contracts
If increasing sales will help to solve your working capital challenges, you may be interested in retail installment contracts.

You sell a good; your customer makes installments until the item is paid for.  Many times there is an interest-free time frame to prompt a speedier payoff.

This service is usually only available to customers with A credit.  However, some funding sources will offer credit terms to B, C or even D credit customers, enabling a retailer to make more sales and increase cash flow.  The lower the credit score, the higher the discount.  Depending on the length of terms, D credit may be discounted as high as 40 percent.

The market for installment contracts has expanded beyond traditional home electronics and appliances and is now used for club membership dues, goods sold on infomercials or even new siding for your house.