Alternative Sources of Capital

Mention the word "Factoring" to most small businessman and the response is either one of two things - a blank look or a face of grimace and pain. But like all things financial, factoring has its place. For many young companies it is the only available source of outside growth capital and fortunately not as expensive as many think. The days of loan sharks and hard money lenders have long since been replaced with reputable, nationwide lenders and franchises. The all-in cost of capital for a top tier factoring company is more akin to a high interest rate loan than what historically was considered a "factor" loan.

For most new small businesses, the SBA loan programs remain the cheapest, best source of capital. But for those that do not have the requisite operating history or lack the time and talent to build a financing package, the SBA loans will not be accessible. For these companies, an asset based lender that will factor their invoices may be the next best alternative. "5%" is a common number thrown around when people talk about factoring. By this, they typically mean that for an invoice that is loaned (or factored) against and then paid 30 days later, the factor lender keeps 5% of total invoice amount. This can get expensive but still better than lost business due to lack of working capital. The good news is that some of the leading asset based lenders offer 0.75 - 1.25% factor loans for even the youngest of companies that are growing rapidly. The all-in annualized cost of capital for these loans is somewhere between 17-20%. This is certainly more expensive than an SBA 7(a) line of credit at Prime + 2%, but still more of a loan than a "stick in the eye" and of course, much better than having to sell equity. These factoring companies can become excellent bridge financing between the founders capital and a SBA loan.