Business Financing: More Options for Start-Ups

Short of cash or credit for your business? Year end is a great time to review financing options with business-owner clients, especially if there is a pressing need for a few new assets in the business. There may be value in a couple of options beyond bank financing.

Last week we looked at two traditional bank sources of financing for start-up businesses, government guarantee loans and term loans or lines of credit. There are other ways to finance a start-up business venture and these alternatives to bank financing may be more suitable for your business-owner clients, depending on the current and future needs of their business as well as how lending institutions view the business plan and the strength of the owner’s personal guarantee.

Factor Financing (Accounts Receivable Financing). Accounts receivable factoring could be an option for a start-up that has good, credit-worthy customers. The credit adjudication for the lender depends largely on the strength of the customer, not the business.

• The factor company does not need a strong personal guarantee from the business owner as their decision is based mainly on the strength of the customers.
• A benefit of factor financing is it allows the business to collect on its receivables immediately after invoicing and build up working capital to support future orders.
• For an in-depth explanation of factor financing, please see our article “Factor Financing: What is it and how does it work?” on www.farberfinancial.com.

Equipment Leasing. For a business that requires significant equipment purchases at start-up, leasing is an option.

• The typical term is 36 or 48 months and rates range from prime to 22% depending on the strength of the borrower and type of asset.
• The lender will typically lend 100% of the cost of asset including installation and delivery costs. Equipment leasing cannot be used to purchase assets such as leasehold improvements or HVAC units, which after installation become part of the physical building.
• The borrower will have the option to purchase the asset for a nominal amount at the conclusion of the lease.

Farber’s Small Transaction Financing group specializes in arranging financing for businesses that are either experiencing growth, a bump in the road, or are in distress. Please contact Eric Friedberg, CPA, CMA at 416.496.3078 or efriedberg@farberfinancial.com.

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