Manufacturers & Distributors ARTICLE -

3 Business Funding Alternatives to Consider

Target Audience: Manufacturing and Distributing Companies, M&D Industry, M&A Accountants

It’s official: The recent economic downturn has lasted longer than any recession since the 1930s. Its effect on small to midsize businesses has been devastating. If your distribution company has weathered the storm, congratulations. But if your business requires additional financing to keep operations running, here are three alternatives to consider.

1. Asset-based financing

Asset-based financing (ABF) leverages a company’s assets, including either current assets, such as accounts receivable and inventory, or fixed assets, such as plant and machinery. Specifically, ABF allows you to leverage your distribution business’s assets for short-term, medium-term or long-term needs.

For short-term needs, ABF generally is offered in the form of factoring or revolving loans. With factoring, the loan is based on a company’s sale of part or all of its debts to the lender in return for a substantial percentage of the invoice value. A revolving loan is based on a company’s entire accounts receivable and inventory.

For medium-term needs, ABF loans are based on an existing facility and equipment and may take different forms, such as leasing or sale and leaseback. For long-term needs, ABF loans are based on a company’s real estate.

ABF loans can be easier to obtain than traditional loans because traditional lenders are more concerned with a company’s working capital, debt-to-equity and debt capacity financial ratios for meeting maturing debt obligations, whereas ABF lenders will look at hidden values on the balance sheet.

This includes, for instance, values of accounts receivable and inventory, or fair market values of land and buildings. Because of accumulated depreciation, these items may present a lower net worth on the balance sheet.

Because ABF doesn’t require collateral, however, the cost may be higher than that of traditional financing, which has service fees and interest tacked on.

2. Mezzanine financing

This type of high-yield financing is a hybrid form of debt and equity financing designed to satisfy short-term or interim financing needs for the expansion of existing companies. For example, you can use mezzanine financing for:

• New growth opportunities,
• Mergers and acquisitions,
• A management or other leveraged buyout,
• Corporate restructuring or recapitalization, or
• Debt refinancing.

But if you fail to pay back a mezzanine loan according to the terms, the lender has the option to exchange its stake for an equity interest in your company.

Mezzanine financing generally is easily obtainable and doesn’t require collateral. But your business needs to demonstrate a solid industry track record, reputation and financial performance and present a business plan for expanding. Keep in mind that mezzanine financing is a high risk for the lender. In return for bearing the risk, lenders expect an equally high return — typically in the range of 20% to 30%.

Loans made during a later stage of a business’s growth are seen as less risky, so they’re usually less expensive than those made during an earlier, startup stage. Companies also often obtain mezzanine financing within a year of going public. In such a situation, the loan is structured to be repaid out of the public offering proceeds or to help set the floor price for the public offering.

3. SBA loans

The Small Business Administration (SBA) serves as a guarantor of business loans made by private and other lending institutions for qualifying small businesses. Eligibility requirements vary according to the type of loan. Key factors to consider are: SBA standards for business size, type of business, use of proceeds, ability to repay the loan, collateral, owner’s equity contribution, availability of other business or personal financing sources, and management capability and good character.

There are a variety of SBA loan assistance programs. One to consider is its basic 7(a) loan guaranty program. It serves as the SBA’s primary and most flexible business loan program for a variety of purposes, such as machinery and equipment, furniture and fixtures, land and buildings, leasehold improvements, financing working capital, and certain debt refinancing.

Another option is the Certified Development Company, a 504 loan program. This provides long-term, fixed-rate financing for acquiring real estate or machinery or equipment for expansion or modernization. There’s also the Microloan, a 7(m) loan program. It provides short-term loans up to $35,000 for working capital or inventory, supplies, furniture, fixtures, machinery and equipment.

In addition, the SBA offers a special purpose loan program for assisting with a variety of other specialized business needs and works with business owners through its prequalification program to review and strengthen their business loan applications.

Consider your options

If your distribution company’s cash flow is hurting because of the weak economy, it may be time to consider outside financing options. Talk to your financial advisor about which option is best for your business.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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