Small Business Capital, Digital Lenders and Angels

small business financing

Three financing options for small businesses throughout the business life cycle 

 

 

Whether the intent is to satisfy working capital needs, growth, or other endeavors, business owners should take it upon themselves to understand the various forms of financing available to them.  The most common forms of financing for small businesses are loans offered through traditional banks. 

Banks have historically been instrumental in the growth of companies because they typically provide low rate loans and supplement lack of liquidity.  However, there are circumstances where a business is either not ready, or is incompatible, for bank financing due to their credit profile, business nature, or planned usage of funds.  When these situations arise business owners are often required to turn to alternative means of financing.

Digitally Enabled Lending Platforms:

With the financial crisis of 2007 forcing banks and other financial institutions to tighten their lending practices, small businesses have increasingly turned to “Digitally Enabled” lending platforms for their capital needs.  “Digitally Enabled” lending platforms are online lending platforms that provide capital to people and businesses exclusively through technological interfaces.  

These platforms typically provide business with loans up to one million dollars with terms ordinarily ranging from six to sixty months, and unlike the traditional lending practices of banks, online platforms, such as:

Fundation, Kabbage and OnDeck Capital, utilize proprietary algorithms which enable them to quickly offer loans based off a wide array of data that is typically ignored by traditional lenders.  Unlike “Peer to Peer” (P2P) lending, which refers to transactions facilitated by an intermediary between capital providers and those seeking financing, Fundation and Ondeck Capital are direct lenders, meaning they lend off of their balance sheet to borrowers who are approved on their platforms.  Doug Gordon, Co-Founder and Executive Vice President of Fundation, states that the benefits of electing to assert this mode of financing is that “Digitally enabled lending platforms, such as Fundation, can provide attractive products and customer service, just like someone would expect from their bank, but with the speed and efficiency one would expect from a technology innovator." 

Accounts Receivable Factoring:

Accounts receivable factoring like the Interface Financial Group is a common form of financing for business looking to maintain adequate levels of liquidity after they either provide a service or sell a product on account.  What typically happens in these scenarios is that a business will sell its accounts receivables or invoices to a third party finance company, otherwise known as the “factor”, and the factor will then advance the monies to the business, collect on the company’s receivables, and pocket the amount fronted plus a fee. 

Factors will commonly advance between 80% and 95% of the total value of receivables; however, the terms usually vary for different industries, credit profiles, and other factors.  Traditional banks do in some cases provide this type of financing; however, there are firms such as Star Funding that exclusively specialize in these types of transactions.  The primary benefit of this model of financing is that businesses don’t have to wait for their customers to pay on account; instead they receive cash quickly and are able to maintain the growth of their business.  Another benefit of utilizing a factor is that small business have the opportunity to establish a viable track record; in which case the chances of having an opportunity to engage in a future business relationship with a bank ultimately increases. 

Next- Angel Funding

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About the author

Alex Hart

Alexander J. Hart of Cuban American decent is principal and founder of Hart Vida Raffo. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and capital consulting. Whether advising on capital and financing strategy or consulting for privately-held professional services firms, Alex has the expertise and practical know-how to help any company optimize their business processes and make tactical financial decisions. He began his career at IBM in sales operations and accounting. He was a Controller for the N.Y. Post, has been a CFO for a medical device company, and has written a tax column called “Ask the Tax Guys” for Micro-Cap Review. Alex is a professional member of A.L.T.A. (Affiliated Lawyers of the Americas), a member of the National Association of Tax Preparers, and is a contributing author and mentor at Latin Business Today. Alex graduated from St. John’s University with a B.A. in Spanish and his M.B.A. in Finance. He obtained his accounting degree from Pace University.

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