It's a fact of life; your company needs capital to conduct business.  Of course the best way to obtain it is through sales.  Sometimes, however, you need other, more immediate sources.  Different sources may be appropriate for different stages of growth.  Start-ups often rely on family members, friends, or local associates.  As you grow, you may need to turn to alternate sources such as Venture Capital.  Once you have achieved a financial track record, you can turn to other sources such as Asset-Based Lending or Commercial Loans.

This section will help you to explore your financing options to meet your needs. We have listed descriptions of some of the major sources of financing options and when to use them.  As this site develops, we will provide a more in-depth analysis of these options as well as a list of companies to contact for your financing needs.

Table of Contents

Venture Capital

One problem many new businesses face is raising sufficient capital.  A business in its primary phase will also face a difficult challenge getting a bank loan.  One alternative is venture capital.  Venture capital firms offer capital in exchange for equity in a company.  This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.

Asset-Based Financing

Asset-based lending has become increasingly popular as a means of financing growth and providing working capital.  Asset-based financing is a general term whereby a lender accepts as collateral the assets of a company in exchange for a loan.  Most asset-based loans are financed against accounts receivable and less often, against inventory since receivables are among the most liquid of a company's assets followed by inventory.  Receivables are favored by lenders since they self-liquidate in a short period of time by themselves and are not susceptible to problems such as shrinkage or physical damage.

Another type of asset-based lending rapidly gaining popularity is factoring.  Factoring is defined as the purchasing of a company's accounts receivable on a non-recourse basis.

Asset-based lending may be the best source of working capital for companies in turnaround where traditional bank loans may not be available or for new and rapidly growing companies where high levels of growth cause the business cycle to outpace the collection of receivables.

Long Term Debt

Long term debt is one of the initial financing avenues a company should pursue.  Most long term debt takes on the form of a loan where the interest and part of the principal are paid back in equal installments over the life of the loan. Some of the sources for business loans include the following:

• commercial banks
• government sponsored loan programs
• small business investment companies
• private lenders

Lines of Credit

A line of credit loan is designed to provide short term funds to a company in order to maintain a positive cash flow.  Then, as funds are generated later in the business cycle, the loan is repaid.  Most commercial banks offer a revolving line of credit, where a fixed amount is available.  As funds are used, the "credit line" is reduced and when payments are made, the line is replenished.  One advantage of a line of credit is that no interest is accrued until the funds are withdrawn, but the line is immediately available for the company's cash flow needs.

Letters of Credit

A letter of credit is a guarantee from a bank that a specific obligation will be honored by the bank if the borrower fails to pay.  Letters of credit can be useful when dealing with new vendors who may not be assured of a company's credit worthiness.  The bank would then offer a letter of credit as an assurance to the vendor of payment.  Although no funds are paid by the bank, the credit requirements for a line of credit and a letter of credit are similar.

Loan Workouts

A loan workout is the process of repaying a problem loan in a fashion that is most agreeable to the lender and the company.  Among the steps involved in a successful workout are maintaining communication with the lender, creating a revised payment schedule, and forming a workout team composed of the company's management, representatives from the lending institution, and legal counsel to manage the process.  One of the initial steps in workout proceedings is to recognize that repayment of the loan will not occur.  The earlier the company recognizes that a problem exists, the greater their flexibility in dealing with the problem.  Financial consultants who specialize in loan workouts are also available to coordinate the efforts of the company and the lender.  These consultants can direct the workout team's efforts and suggest solutions to the problem.

Floor Planning

Although relatively new as a financial instrument, floor planning is another asset-based lending approach in which companies can finance their inventories.  In floor planning, inventory is financed based on the credit of the vendor as well as the company receiving the financing.  The inventory purchased acts as collateral until the sale is made.

Small Company Offering Registration

Another type of equity financing is a small company offering registration or SCOR.  Since the laws governing private sales of securities are somewhat restrictive, SCORs provide a means of selling common stock to the public.  Companies can trade their common stock over the counter rather than deal with the difficulties that initial public offerings face.