This article are provided for information purposes only, and are not intended as legal advice.


What is the cheapest form of financing a business?

November 23rd, 2009

Business is expanding, your receivables are growing and you approached your banker for a loan.  Unfortunately, the banker looks at historical numbers and does not lend on what you need for the future.  If your sales and profit was $X in the past, that is what they base your loan on, assuming you qualify for a loan.   If you landed a new customer that will generate $1 million in more sales, they will not lend you additional working capital to help you with that customer.  Bankers are there when you don’t need them but they definitely are not there when you need them the most.

 

If you have new business then there are several options which you can select.  You can use asset based lending which looks at your customers and looks at your future revenue and will lend on your current receivables.  This provides you with large amounts of capital when you need it and you are growing however this type of financing is closely monitored by the financial institution, usually weekly therefore there is a lot of administration required and your accounting records must be kept up daily for this to work.  Typically, your borrowing limits are reset weekly based on your current receivables.  There are a lot of fees associated with this type of financing but it works for companies with large amounts of inventory selling to major businesses and whose sales are continually increasing.

 

In addition to asset based lending, you can look at factoring.  Typically, factoring companies want all or your receivables, they rarely say that you can factor only one customer.  They look at all your customers and tell you which ones they don’t want but they are looking at all your good receivables.  They are expensive and they will not cover receivables in all industries.

 

You may need additional working capital therefore you may need an angel investor or venture capital firm to invest in your business. 

 

 If you have great receivables, the cheapest form of financing will be to give your customers a discount for paying early.  This will be far cheaper than any other form of financing, there are no third party fees and if you offer them an incentive, you may be able to get paid in the next day or two versus one of the other forms of financing which takes some time to set up.


Filed under: Financing a business — Gary Landa @ 10:16 am


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