Five alternative sources of capital.
Your small company isn't sexy enough to entice venture capital nor does your collateral give skittish banks enough comfort. Bootstrapping aside, here are five often overlooked alternative sources of funding in this tough environment.
Local Development
This hodgepodge includes a host of intermediaries under the auspices of the Small Business Administration. Gaining prominence are Community Development Financial Institutions (previously known as Community Development Corporations); these entities have more resources to throw around thanks to sponsorship in recent years by the U.S. Treasury. Development programs tend to offer larger loans at lower rates than banks do, though you'll be expected to create jobs (or at least maintain them) in the community.
Asset-Based Financing
A great source of working capital for companies that market to other businesses and to governments--but beware the hefty tolls. One method, called factoring, involves selling your receivables at a discount, up to 3%. That means if you offer 30-day payment terms, you will pay 3% for the privilege of getting your money 30 days before it's due. Even without compounding, the annual cost of that capital is 36%. Some factors tack on penalties if the receivables don't pay out.
Asset-based lenders use your receivables as collateral. They often charge 200 to 600 basis points above rates that banks offer small businesses (typically prime plus two percentage points). Unlike term loans, asset loans are lines of credit, so you pay interest only on the amount you use. Asset-based lenders prefer loans of decent size ($500,000 and up), while factors might buy just $20,000 in monthly receivables.
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