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April 5, 2016

Originally featured in Thinking Bigger Magazine - March 2015

As a small business owner, there may come a time, if it hasn’t already, when you need money and you need it now.

There are a variety of funding options available: banks, home equity, the SBA, friends and family, investors, accounts receivable factoring, credit cards—the list goes on and on.

However, what if you have exhausted all of those sources and still have a short-term need for cash? As you begin the quest to find financing, you may consider alternative funding—an option becoming increasingly popular for small businesses across the country. 

 Because the traditional banking system’s regulations have made it increasingly difficult, time-consuming and, in some cases, impossible for a small business to get quick funding from their bank, this niche financing  industry has emerged, filling a need that many  primary funding resources have overlooked. 

What Exactly Is Alternative Funding?

Lending Club and Kabbage are two examples of companies providing alternative funding services. These, as well as other organizations in this niche, are primarily online resources focused on providing fast and flexible short-term financing to small businesses.

Typical lending ranges from $10,000 to $100,000. After the process has started, it usually takes about a day for the company to receive financing, assuming all the funding conditions have been met.

Kansas City is actually home to an alternative funder, CapFusion. Though the company provides funding to small businesses across the country, the company’s founders are based in Kansas City. And they may pay extra attention if they receive an application from a business that is located here, too.

Why Isn’t Everybody Using Alternative Funding?

There are pros and cons to all funding options, but the main cons associated with alternative funding include the associated costs, the dollar limits and the relative experience of the lender.

The costs of these loans can be significantly more than annualized rates associated with conventional financing. Using alternative funding, a typical transaction’s annualized interest expense is anywhere from 30 percent to 50 percent. Remember, there is a reason this niche is referred to as “alternative funding” and not primary funding.

Additionally, the players in this space typically lend in much lower dollar amounts than other types of financing. The thought behind this being, once a company has stabilized its cash flow and has time to patiently search for the best conventional financing arrangement, it will no longer need alternative financing. 

Lastly, as a relatively new niche, many companies in this space are relatively young. Some small business owners simply may prefer working with more established, well-recognized institutions.

What You Should Do

As if running a business doesn’t present enough challenge to the small business owner, I’ll add one more. It is important to understand all the financing options available to you and the pros and cons before you make a decision. Put in the time and effort to analyze your alternative financing options, the same way you would research other goods and services.

While working with an online alternative funding source may be your best solution, make sure your needs align with the company’s capabilities, and make certain you are working with the lending company that will be providing the financing, versus a broker, which will lead to substantially more costs.

Learn more about the author of this article, Daniel Kjergaard and our Entrepreneurial Services Group.




March 4, 2016

This morning the Kansas City CFO group met for their first quarter event , entitled “How to Finance Your Business: A discussion with Kansas City’s local banks & non-traditional financing resources”, featuring a panel of financial experts including Mike Maddox, CrossFirst Bank, Cory Miller, UMB Bank and Mike Roznowski, Fractal Capital Advisors.

The panel discussion focused on the current state of the lending environment, as well as the financing options available at varying risk levels. The panel fielded a variety of questions including how the new rules and requirements surrounding HVCRE will affect the real estate market, trends in pricing and leverage multiples, personal guarantees, covenants and the new guidelines regarding leverage loans and the impact on credit decisions moving forward. 

A few key notes: 

How should a CFO prepare, to present their company in the best possible light when meeting with a lender?

Mike M: “Be organized, prepared and ready to talk about your company and what’s going on.”

Cory: “Be responsive, as the finance executive, it’s important to be responsive when receiving questions from a lending source. For example, if you are taking too long to respond to emails containing financing questions, it may add unnecessary skepticism to how much of a handle you actually have on your business.”

Mike R: "From an alternative funding perspective, companies seeking this option have often been turned away by the bank(s) for one reason or another – clearly getting those hurdles out front early, so we can work together to move forward, is key."

What should a CFO look for / consider when seeking a financial resource?

Mike M: "Do your due diligence on the source and consider the four C’s. Does your source have character?  Are they committed to the market and industry you are working within? Are they competent in your business, your industry and your growth potential and most importantly, do you connect?"

Mike R: "Adding on to Mike’s comments, the connection and commitment are key – it’s imperative you understand how the lender is going to behave if everything doesn’t go exactly as planned."

Cory: “Use your peers. Your CPA and Attorney have those banking relationships and understand how those resources work. You want to make sure you have a good relationship and connection with whomever you choose, so that you can work through those unexpected bumps in the road.”

Save the date for the second quarter Kansas City CFO Breakfast event on June 2nd, featuring Greg Graves. Look for more information in your inbox in the coming months! 
 




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