Options in Business Finance Bank loans aren’t the only way to finance your company’s growth.
By Dianna Reed
Business owners have several options available for working capital. Most people’s first thought is to go to their local bank. However, with a little attention and research, you’ll quickly find that you have other options. These options can complement services offered through traditional banking institutions. Some of the options you might consider are trade-financing solutions such as accounts receivable financing, purchase order funding, lease options, contract funding or letters of credit.
Accounts Receivable Financing Accounts receivable financing is the process of purchasing commercial accounts receivable (invoices) from a business at a discount. This means, you, the holder of an invoice, can sell the invoice today to receive an immediate cash advance.
This is an option for small to mid-size companies that need short-term or complementary financing to help with growth opportunities or to cover current expenses. Fees range from 2 to 5 percent and depend on the funding organization and the strength of your customer.
There are many benefits, including that accounts receivable financing is accessible and flexible, it stimulates cash flow and it focuses on the strength of a business’s clients rather than the business itself. In addition, accounts receivable financing can work in synergy with traditional credit lines. Purchase Order Funding Purchase order funding is the process of obtaining money in advance against a contract/purchase order to fund direct costs of fulfilling that order. A purchase order is simply a promise to purchase goods. Many suppliers will not start production or release product until either a letter of credit has been posted or payment has been received. Purchase order funding works best with a business that orders goods directly from manufacturers that ship directly to clients within a specified time frame.
This type of funding is appropriate for wholesalers, distributors, importers and exporters that purchase goods for resale, clients with high profit margins, clients with strong, creditworthy customers or suppliers, businesses that occasionally have unusually large purchase orders and businesses that experience seasonal surges.
The cost of purchase order financing can be based on a percentage of profits, of purchase order total or a percentage of the actual funds advanced. The cost of financing should favorably offset the cost of additional equity, venture capital or lost profits and growth. Purchase order funding eliminates the threat of losing customers due to inability to promptly fill orders, and it establishes favorable payment terms with suppliers.
Contract Funding Contract funding is the process of obtaining money in advance for a service that has been ordered. The advance maximums are up to 50 percent of the contract value. Contract funding is similar to purchase order funding, except that contract documentation is used to order a service rather than a product.
This arrangement works well for wholesalers, distributors, importers, exporters and clients with high profit margins. Since this type of financing is riskier, a businesses reputation plays an important role, as well as a strong performance history. Businesses in this arena should be able to fill the contract in fewer than 30 days and must have a high profit margin on their products to afford the funding fees.
Lease Options A lease option is the method used for financing business equipment. There is a broad market for leasing, so shop around and ask for referrals from business associates.
Lease options allow companies to obtain equipment with minimal outlays of cash, preserve existing lines of credit and reduce taxes. There are several lease options available depending on a businesses needs, and costs can vary. Examples are the true/tax lease, allowing the lessee to claim rental payments as tax deductions; the $1 out lease, allowing ownership to be transferred to the lessee for $1 at the end of a lease; and FMV lease, allowing the lessee the option to purchase the equipment at "fair market value.”
Letter of Credit A letter of credit is the promise of one party to pay another party’s draft or demand for payment. It essentially substitutes the creditworthiness of the funding source for the creditworthiness of the buyer. Letters of credit are used in domestic transactions, but more frequently are used in international trade where companies are importing products.
Letters of credit are treated as loans, and funding sources charge interest rates just like a commercial loan. A letter of credit allows a business to show financial viability in order to purchase goods or services internationally, at greater quantities and at cheaper prices than available domestically. Dianna R. Reed is president of Dominion Capital Funding, a consulting firm that specializes in accounts receivable financing, purchase order and mortgage note funding. She is a certified underwriter for Millennium Funding. You can reach her at (866) 322-8675 ext. 256 or by e-mail at
