Alternative bank financing has significantly increased since 2008. In contrast to bank lenders, alternative lenders typically place greater importance on a business’s growth potential, future revenues, and asset values rather than its historic profitability, balance sheet strength, or creditworthiness. Alternative lending rates can be higher than traditional bank loans. However, the higher cost of funding may often be an acceptable or sole alternative in the absence of conventional financing. What follows is a rough sketch of the alternative lending landscape.
Factoring is the financing of account receivables. Factors are more focused on the receivables/collateral rather than the strength of the balance sheet. Characteristics lend funds up to a maximum of 80% of receivable value. Foreign receivables are generally excluded, as are stale receivables. Receivables older than 30 days and any receivable concentrations are usually discounted more significantly than 80%. Factorgenerally managely the bookkeeping and collections of receivables. Factors typically charge a fee plus interest.
Asset-Based Lending is financing assets such as inventory, equipment, machinery, real estate, and certain intangibles. Asset-based lenders will generally lend no greater than 70% of the assets’ value. Asset-based loans may be term or bridge loans. Asset-based lenders usually charge a closing fee and interest. Appraisal fees are required to establish the value of
The asset(s). Sale & Lease-Back Financing. This method of financing involves the simultaneous selling of real estate or equipment at a market value usually established by an appraisal and leasing the asset back at a market rate for 10 to 25 years. Financing is offset by a lease payment. Additionally, a tax liability may have to be recognized on the sale transaction. Purchase Order Trade Financing is a fee-based, short-term loan.
If the manufacturer’s credit is acceptable, the purchase order (PO) lender issues a Letter of Credit to the manufacturer guaranteeing payment for products meeting pre-established standards. Once the products are inspected, they are shipped to the customer (often manufacturing facilities are overseas), and an invoice is generated. At this point, the bank or other source of funds pays the PO lender for the funds advanced. Once the PO lender receives payment, it subtracts its fee and remits the balance to the business. PO financing can be a cost-effective alternative to maintaining inventory.