Grow Your Own Biz - Financing & Captial - Non-Bank Lenders
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Finance companies offer a growing alternative for financing needs of small business. The major differences between banks and finance companies are the criteria used to evaluate borrowers and the level of risk the institutions are willing to assume. Finance companies usually assume higher risk and therefore charge higher interest rates than commercial banks.
Over the past several decades, business lending by finance companies has increased at a faster rate than business lending by commercial banks. Increasingly, finance companies are providing asset-based lending services. Instead of focusing on a firm's historical operating record and cash flow, finance companies will lend money based on the value of the company's equipment, inventory, or accounts receivable. Asset-based lending is secured lending in which money is loaned using the borrower's assets as collateral. The lender's risk is mitigated by closely monitoring the quality and performance of the asset.
Asset-based lending is especially useful when the company confronts issues such as high growth or seasonal variations in business. In these environments, traditional unsecured lending is unlikely to satisfy all financing needs, and asset-based lending becomes a viable alternative. This method of lending is generally focused on providing secured working capital loans (with the amount that can be borrowed determined by established percentages of the advance against accounts receivable or inventory). By borrowing against its accounts receivable, a company can accelerate its cash collection cycle and improve its ability to purchase additional inventory to build sales. The result improvement in cash flow can be accomplished without giving up any ownership control.
In a traditional arrangement, the asset-based lender extends credit against 80 percent of eligible receivables (with the remaining 20 percent serving as a reserve). Eligibility is generally determined by the quality of the receivable. As the invoices are paid, the amounts received are applied against the borrower's loan.
Purchase order financing is another example of asset-based lending. This may be attractive to a company that has stretched its credit relations with vendors and has reached its lending capacity at the bank. The inability to finance raw materials to fill all orders would leave a company operating under capacity. The asset-based lender finances the purchase of the raw material, and the purchase orders are then assigned to the lender. After the orders are filled, payment is made to the lender, and the lender then deducts its costs and fees and remits the balance to the company.
The interest cost of this source of financing can be relatively expensive. Terms can be as low as prime plus three percent, but can also be as high as prime plus ten percent. Asset-based lenders usually require first liens on assets and almost always require personal guarantees. Lenders may also move quickly to liquidate collateral where necessary. The advantage of this type of financing is that it is available to companies with a strong asset base but with insufficient cash flow to qualify for a traditional loan.
Specialized Asset-Based Lenders
There are a number of asset-based financing sources that restrict their operations to various areas.
First Exim operates a specialized purchase order funding program (in 129 countries) for exporters and importers. The merchandise must be finished goods inspected prior to payment by a letter of credit and sold to a customer covered under a credit insurance policy. First Exim will actually purchase the goods from the vendor, supervise the shipping of the goods, and collect payment under the letter of credit from the customer.
The centerpiece of PrinVest's financing offering is its federal government receivables financing program. PrinVest provides loans to private sector businesses that have been awarded contracts or purchase orders by the US government or any of its agencies.
Transcap focuses on light manufacturers and distributors. Transcap designed their program to provide all necessary inventory financing to their clients through letters of credit, cash and other short-term financing options.
A credit union is a member-owned, non-profit institution formed to encourage saving and offer low-interest loans to members. The members are usually people working for the same employer, belonging to the same association, or living in the same community. As of December 1999, there were 65 federally chartered and 110 state chartered credit unions in North Carolina. For a directory of credit unions in NC, please contact the North Carolina Department of Commerce's Credit Union Division at 919-850-2929 or www.nccud.org.
COMMUNITY DEVELOPMENT CREDIT UNIONS (CDCUs)
CDCUs are member-controlled financial cooperatives that can effectively finance community-based entrepreneurs in low-wealth and/or minority communities. CDCUs are relatively easy to charter at the state or federal levels and can provide a full range of lending services with assets of $5 million.
North Carolina has one of the highest concentration of minority, community-based credit unions in the country. Sixteen active community-based community development credit unions are located throughout the state, three of which recently opened their doors. For a complete list, see www.cdcu.coop. CDCUs are designed to stimulate economic growth in low-income areas through business and consumer loans at reasonable rates of interest. Since 1991, $140 million in loans have been made to members across the state.
The North Carolina Minority Support Center was formed in 1990 to support the work of CDCUs throughout the state by offering technical assistance and providing capital support. The center is the only statewide CDCU intermediary of its kind in the country.
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