By Lawrence Hurwitz, Lawrence Financial Group
Finding capital and financing for a mid-size business is one of the most challenging tasks of the entrepreneur.
The best way to access a cost-effective source of funding is to work with an experienced advisor. An advisor can help you identify the most appropriate lenders and assist in the complicated negotiation to get to a timely close.
There are numerous options to find a loan, but it is important to understand the pros and cons of each option.
1. If the company is profitable the first place to look is the local bank. If a bank is offering a line of credit it most probably will require personal guarantees from the owners. And due diligence is often quite time-consuming. However, the cost of funds will be substantially lower than other alternatives.
2. A second potential source is commercial finance companies. If the borrowers have fungible assets this is often a good choice even if profitability won’t work at a bank. Acceptable collateral includes accounts receivable, inventory and equipment. Depending on the structure it can be a cost-effective way to get needed capital.
3. If the entrepreneur has a more challenging situation, he may have to resort to more costly sources such as a factor. Factors purchase invoiced sales and then collect from the customer. Fees are charged on each invoice so it can be expensive.
4. In the event there are no assets and minimal profitability borrowers may have to utilize cash advances. These are based on monthly sales volume and bank deposits. There is an immediate markup on the loan. E.g. $100 thousand loan might require repayment of $120 thousand. Payments may be daily or weekly.
5. Companies that own real estate frequently seek mortgage loans secured by their property. Real estate lenders usually advance a percentage of appraised value.
6. Another opportunity is to use purchase orders from customers. These lenders advance enough to manufacture the products and collect once the goods have been delivered.
7. If the entrepreneur is looking for money to purchase new equipment a leasing company may be the solution. Such firms will buy needed equipment and lease it back.
8. If all else fails a borrower may get backing from private sources such as hedge funds and family offices. These options often will require options or equity in the business.
About the Author
Since 1990, Lawrence Hurwitz has provided more than $7 billion in financing. Lawrence specializes in difficult transactions including turnarounds and fast-growing situations. Prior to establishing his own firm, he served as CEO of a Wall Street brokerage house and as president of a family-owned retail store chain.