To lease equipment (S, R, M) Leasing is a way to get equipment you need without tying up cash or inhibiting your borrowing ability. While leasing will cost you somewhat more than purchasing equipment, you may not need to list it as a liability on your balance sheet or even make a down payment, depending on how the lease is structured. What's more, most lease payments are tax deductible, whereas if you buy an asset, you need to depreciate it over its useful life.
Leasing companies are plentiful, and many banks have gotten into the business in recent years. Although you should always shop around for terms, you'll usually get the best deal from companies that specialize in the type of asset you're hoping to lease. You won't have to educate them about the equipment, and they're apt to offer a better price.
Lessors, like banks, will do extensive credit checks, but some will take on a higher level of risk in exchange for higher rates. The easiest way to find leasing companies is by talking to bankers, other lessors, or venture capitalists. Or you can contact the Equipment Leasing Association of America, in Arlington, Va., at 703-527-8655.
Leaning On Customers
To prepay (S, R, M) Whatever stigma once may have been attached to asking your customers to help you finance your business, it's not relevant in the current environment. People everywhere recognize that credit is tight. Indeed, if you explain the rationale for why you need your customers to pay on an accelerated timetable -- and point out how they will benefit -- there's a good chance you'll get some cooperation.
A number of equipment manufacturers, for instance, require customers to make big initial payments to cover the working-capital requirements (for materials, labor, and so on) on a particular order. Without that kind of financing, they'd have to turn down orders or work slower. But it's not just manufacturers that can use this approach. Service companies, too, have been successful at getting advance payments, provided they can cite compelling reasons for why they need them.
To pay suppliers directly (S, M, S-U) This is a way around having to raise money to pay subcontractors who insist on prepayment. You "presell" your product or service and get your customer to pay your suppliers directly.
We recently heard an example of this from someone who works with inventors. One of his clients had a patented idea for a promising houseware item, and a manufacturer that could make it. Problem was, the manufacturer needed a big advance payment, which the inventor didn't have. They presented the idea to a large retailer, which liked it so much it offered to help out. The retailer agreed to pay the manufacturer up front for part of the order and to pay the balance upon acceptance. The inventor gave up nothing -- and didn't have to raise money.
The only way these deals can work is if you have a customer who is dying for your product or service -- and it helps to have a patent. Another drawback: there's no system set up to put these deals together. Some managers do them on their own. Brokers and intermediaries specializing in them will do such deals either for a fee or for a piece of the action. But these specialists are not easy to find. Your best shot is to network and check ads in business publications.
For minority loans (S, M, S-U) If you are a minority vendor working on contract with a major company, there's a good chance you can qualify for a special loan under a program of the National Minority Suppliers Development Council Inc. (NMSDC), based in New York City. Nearly half of the Fortune 500 companies and hundreds of others participate in this program to provide money to ethnic-minority-owned companies that are having trouble obtaining it. The program, called the Business Consortium Fund (BCF), is four years old and has made loans to about 200 companies owned by African Americans, Hispanics, Asians, or others.
Here's how it works: Once you've been certified by an affiliated regional council, you periodically receive a listing of the companies in the program. If you have a purchase order or contract from a company on the list, you take it to a participating bank. The bank verifies the contract and, assuming the banker thinks your business is viable and therefore able to deliver on the contract, it recommends the loan to the BCF. In giving its nod, the bank agrees to lend 25% of the loan, with the NMSDC lending the rest.
Borrowers are limited to total loans of $500,000 under this program; the term can't be longer than the length of the contract or exceed four years. As for the rate, the nonbank portion is at prime, while the bank gets to charge 30% over prime, a sweetener to do the deal. For minority company owners looking to establish their creditworthiness and a relationship with a bank, this is a great way to do it. For more information, call the NMSDC at 212-944-2430.
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Dressing Up For Bankers
To allow inventory as collateral (R, M) Among a banker's darkest nightmares is to make a loan using inventory as collateral and then get stuck with a failed business and vanishing inventory. That makes many career-conscious lenders reluctant to place much value on inventory these days. But in the current credit crunch, we've run into an unusual breed of financial intermediary. For a price, these people will stick their necks out and help clients get financing. They actually guarantee the value of your inventory. That gives lenders confidence that, if things unravel, they won't have to write off the loan.
Naturally, this service isn't free. To get someone to say the inventory is worth x% of its original cost may run you around 2% to 3% of the guarantee; getting a guarantor to commit to a dollar value is more expensive -- 5% or more -- because the guarantor has to ensure the inventory is actually there. Finding these guarantors is tricky because they are few and far between, and don't usually advertise. To track them down, talk to financial people who know your industry, particularly the liquidation end of it.
