The primary sources of business financing that are well branded via the banks are traditional forms of lending that provide lower risk rate for low risk deals, and only finance low risk deals. Any by definition provided by banks, low risk relates to a business balance sheet with a debt to equity level before and after new business financing is issued of 2:1 and a debt serving ratio of at least 1.20 (available cash flow must be 1.2 times the projected debt service).
But what if you’re business does not fall into these parameters? Are you out of luck, or do you keep knocking on similar doors to see if anyone will change their rules?
The reality is that conventional bank financing only provides about 1/3 of the required business financing that makes the economy go round.
The rest of the capital required comes from a number of different lending categories including the following three that I will briefly touch on.
Asset based lending as the name suggests focuses on leveraging the equity in assets that the business owns. There are many different slices to this market and a wide range of financing costs, call lending back to the amount of overall leverage the business is carrying and the inherent risk of loss to the lender.
For situations where there is a strong enough cash flow to cover off higher levels of leverage, there are investment banking and venture capital solutions.
Investment banking is another example of a business financing source that has many different variations, but for the most part this type of financing is placing other peoples money and providing a return on capital between 10% and 20% for the most part. This is accomplished by charging an interest rate on capital advanced as well as taking an equity stake in the business. Financing can be at or close to 100% of the capital required, depending on the deal. Approvals tend to be granted towards deals in specific industries and with well established and proven applicants or business teams.
Venture capital is a very common term in the business financing world, but tends to relate to a small percentage of cases where capital is required.
This largely due to the fact that venture capital is typically looking for a 30%+ return and are prepared to invest in growth industries that can be high risk but are also high potential for big returns. Because of the risk element associated with these types of deals, the majority of investments tend to fail, with the overall weighted return on capital being provided by a small percentage of deals that achieved their market potential.
There are many more examples of business financing sources out in the market place that may or may not be relevant to any particular situation.
The point here is that understanding where to look for money and what is relevant to your business requirements is going to be very important to locating and securing the capital you’re looking for.
And while even a blind squirrel can trip over an acorn every once in awhile, looking for capital strictly by trial and error is likely not going to be very successful, or can result in you paying far more for the capital you secure that you need to.