Alternative Financing Options
Posted Apr 28, 2011 in Management
If a bank isn't willing to take a risk on your growing laboratory or you simply want to conserve your "borrowing power," you may want to consider one of these financing alternatives:
Leasing. If you're seeking money to purchase equipment, think about leasing. Although interest rates mean you pay more over the long-term than if you paid up front, leasing offers many advantages: it minimizes demands on cash flow, keeps other lines of credit open and helps your laboratory establish a history of good credit with a third-party lender. "We recently leased a $25,000 system because we had just built our new facility and didn't have a lot of cash on hand," says Terri Fodor, co-owner of Secret Aesthetics in Cuyahoga Falls, Ohio. "It allowed us to get a much-needed system in house and to have a monthly payment that we could handle."
In addition, since leasing arrangements require less paperwork than a bank loan, they're easier to process. This option also gives you the ability to upgrade your equipment when newer technology hits the market and eliminates the hassle of selling equipment at a severely depreciated value. In addition, some leases now cover the consumables items that go with the system; ask your manufacturer or supplier for details.
When signing your lease agreement, be sure it's considered a "true lease"--where there's a portion of the total cost that you must pay if you want to buy the leased item at the end of the lease period. The amount to be paid at the end of the lease must be considered "reasonable" by the IRS. For example, a "dollar buyout"--in which the laboratory simply pays $1 at the end of the lease--may not be viewed as a true lease. "If there's nothing to pay at the end of the rental term, the IRS will consider it financing rather than a lease," says Stommel. "Lease payments can be more favorable because they are usually treated as a pre-tax business expense to reduce your taxes."
Factoring is a viable, short-term option for a cash-hungry laboratory because it turns accounts receivables into cash. In general, factoring means that you sell your accounts receivables to a company--also called a factor--that then collects payment from your customers. Although terms vary, factors generally advance you approximately 80 cents on the dollar for your invoice, then send a letter to your dentist-clients asking them to pay the factor rather than your laboratory. Once the dentist pays the invoice, the factor usually takes out a 3 to 6% fee and then gives you the remaining 14 to 17 cents on the dollar. For example, "if you sell $10,000 in invoices, the factor gives you $8,000. Then, once the debts are paid, the factor keeps approximately $500 as its fee and pays you the remaining $1,500," says Bert Goldberg, a board member of the International Factoring Association.
The benefit of factoring is obvious: rather than waiting 30 days or longer for your clients to pay, you get paid more quickly, therefore increasing your cash flow. However, experts warn that long-term factoring can ultimately eat into your profits. "Factoring isn't free, so most businesses work with a factor for one to two years," says Goldberg. "Be sure to negotiate the most favorable terms possible for your laboratory. Most factors require you to sign a contract and will verify that your invoices are valid and new--not months overdue."
Remember that when you sign over your accounts receivables, you lose some control. For example, in the interest of maintaining a working relationship with a delinquent client, you may choose to extend payment deadlines or employ a more lenient collection approach. A factor's main objective, on the other hand, is to get paid. You may want to negotiate a clause in which you repurchase invoices that go unpaid after a certain amount of time and take over collections. (To contact a factor, see the Toolbox, Prior to the Pitch).
Small business investment companies--or SBICs--are similar to venture capital companies but typically finance small businesses looking for between $200,000 and $4 million. As with banks, SBICs require excellent financial documentation, as well as a good business plan. (To contact a factor, see the Toolbox, Prior to the Pitch).
Angel investors are wealthy business people who invest in select businesses for a financial return. According to Inc., the number of angel investors grew 60% between 1997 and 2000, maybe due, in part, to a growing number of angel 'networks' or databases that link investors with growing companies seeking financing. One such network is the Active Capital sponsored by the Small Business Administration's Office of Advocacy. Businesses--including sole proprietors or partners operating as Limited Liability Corporations (LLCs)--looking for capital in the range of $250,000 to $5 million can list with the network for an annual fee of $450. The network provides angels with access to their financial information. (To contact a factor, see the Toolbox, Prior to the Pitch).
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