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Join the Profitability Revolution
Financial Alternatives for Businesses
Asset Based, Contract and Purchase Order, Accounts Receivable, Venture Capital, Equity
When businesses begin to look for financial services to aid in fulfilling their pre-planned and analyzed objectives, they usually begin by going to their local bank for financial assistance. Those businesses, fortunate enough to be credit worthy, will probably get the financial backing they seek. Small and medium-sized businesses and start-ups are often excluded from bank financing altogether and have to seek funds elsewhere. Some of those financial alternative solutions are addressed in this text.
As the saying goes, "If you don’t need the money, you qualify for a loan, but if you need the money, you can’t qualify". Alternative Financing addresses both sides of the money issue, i.e. higher profitability for those who do not need the money and cash for those who do.
Businesses can be grouped into one of three categories, i.e. growing, maintaining, or losing profitability. Sales revenues fail to provide an adequate category to compare strategies, but profitability is a good classification and comparisons can be meaningful. Alternative Financing applies to all three groups of businesses, i.e. higher profitability can move a business from one category to the next higher level.
Alternative Financing is financing for business that funds soft assets, i.e. contract, accounts receivable, and purchase order financing. Banks and other financial institutions can not provide loans easily for this type of financing, because there are no hard assets (real estate, plant, and equipment) associated with the soft assets that can be used as collateral. Soft assets (contracts, purchase orders, and invoices) are actually the paper part of the associated business transaction and can be sold (or reassigned) to certain financial institutions. When the business transaction is purchased by a financial institution, the process is called Alternative Financing.
Asset based financing is financing for business where hard assets (real estate, plant, and equipment) are used as collateral for loans (or equipment leases) and are often long term loans (debts). The business itself has to be credit worthy. The loan or lease application process can be lengthy and the business may wait for months for an approval. Approvals are not immediate, and that is unfortunate for business. Sometimes windows of opportunity pass before funding can be provided.
Businesses can usually obtain capital (or a line of credit) provided they supply 3 years of financial statements and they themselves are credit worthy. Sometimes there are application fees and additional points involved, and it may take 30 to 75 days to be approved, and debt is an "on balance sheet item" for business and makes the debtor business less valuable.
Businesses use this type of financing for additional working capital and to enhance the growth of the business.
Contract and Purchase Order Financing
This type of financing is new for businesses. It is exciting because contracts and purchase orders are legal documents that initiate a structured cost and payment schedule. The customer agrees to buy and the client agrees to sell. The good news for business is the structured cost associated with this business transaction, and it might be entirely funded (or partially funded). The business transaction begins when the customer issues the contract or purchase order and ends when the customer pays for the delivered goods.
One of the primary differences between this type of financing and asset based financing is the due diligence requirement for approval of the financing. Contract and Purchase Order Financing requires the business and its vendors, suppliers must be performance worthy and its customers must be credit worthy. In other words, the business must demonstrate they have the ability to deliver the goods and their customers are credit worthy. The approval process for contract and purchase order financing can be completed within 2 to 3 weeks rather than the 1 to 3 months required for loan applications.
Unfortunately, not all kinds of businesses can apply for this type of financing. What does not work at all are businesses that provide labor intensive services (like consulting companies) and heavy manufacturing companies that require numerous vendors and suppliers to work in consort in order to manufacture and assemble the product to be sold. However, light manufacturers and resellers are prime candidates for this type of financing.
Contracts are essential for many businesses; however, most businesses receive purchase orders for goods and services. Both the contracts and/or purchase orders may be fully (or partially) funded by financial institutions thereby reducing the working capital requirement for certain business transactions. This means the business has little investment in the transaction, but retains most of the profit associated with the transaction, a high profit solution, and since this is an "off balance sheet item" for business, the value of the business is not reduced.
Businesses use this type of financing primarily to reduce the working capital requirement and enhance the growth of the business.
Recently, this type of financing has become accessible for almost any of the small and medium sized businesses. Accounts Receivable (A/R) Financing is attractive for businesses who offer credit to other business customers. Instead of waiting until the customer decides to pay, the Accounts Receivable Financing Company will advance most of the money immediately to the business after the delivery of the goods and services has been verified. This turns a credit customer into a cash customer, because the working capital is recovered immediately with the advance. The working capital becomes available for the next transaction.
Accounts Receivable Financing is the only form of Alternative Financing strategy that changes the structured payoff for a given business transaction. That is why Accounts Receivable Financing is attractive to businesses. More good news for business is the structured payments associated with this business transaction (advance payments when goods are delivered to the customer and rebate payments when the customer pays). The business recovers the working capital with the advance and receives profits from the remainder of the advance and all of the rebate payments.
One primary difference between this type of financing and asset based financing is the due diligence requirement for approval. Approval for this type of financing is based largely upon the credit worthiness of the customer list for the business. The approval process can be completed within 2 to 14 days rather than the 1 to 3 months required for loan applications.
Businesses with good and dependable customers can apply for Accounts Receivable Financing. Most businesses qualify. Profitability for those businesses can jump in quantum leaps.
All businesses that offer credit to their business customers have accounts receivable and they wait for the customer to pay the bill. When the accounts receivable becomes a major part of the working capital available for the business a greater problem often arises, i.e. a shortage of cash needed for the next business transaction. High profit financial alternatives can provide businesses with the cash that can be used to pay bills and enhance their growth, and since this type of financing is an "off balance sheet item" for business, the value of the business is not reduced.
Businesses use this type of financing primarily to reduce the working capital requirement and to enhance growth.
Venture capital firms simply do not lend money to a business as a bank would. Instead, venture capital firms provide capital in return for an ownership interest, an equity position in the business. Often they become involved in helping to run the business. This text does not elaborate upon the value of venture capital financing. This type of financing rarely increases the profitability of the business; only the ownership changes.
Equity Financing (Going Public)
Selling shares in a company gives the shareholders a say in how the business is run. Sometimes they attempt to run the business. This type of financing very seldom increases the profitability of the business; only the ownership changes.
3W Internet Corporation commits its resources to support every alternative financial specialty that is described in this primer. Although all the computations featured in this document have been thoroughly checked and tested, there may be some functions that rely upon other financial concepts methods, strategies and ideas using software, and protocols not developed by 3W Internet Corporation.
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