sources of finance for small business “alternative finance” finance for smes finance for smes
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OverviewOverview
Who needs financing and why Where do companies go first Where do companies go next What can new companies expect What alternatives exist
What is an SMEWhat is an SME
No single universally accepted definition of a small or medium sized enterpriseGenerally based on turnover, number of its employees, borrowingsor a combination thereof
Initial FinancingInitial Financing
Where do you go first?
The banks Your savings / retirement funds / house Friends / family / “fools” Asset sales Non bank financial institutions
Source: CPA Australia Asia Pac Small business survey 2010
Limited funding optionsLimited funding options
Compared with large companies, smaller businesses tend to make greater use of debt funding And less use of equity funding
The good old days?The good old days?
From the late 1990s till 2007...small businesses generally had sufficient access to bank finance.Unlikely to be a swift return to the conditions prior to the GFC Such conditions probably were unsustainable across all sectors of the economy
Bank loans harder to getBank loans harder to get
Fallout from GFC changed the risk profile of most businessesBanks undertook to mitigate their risks with a review their loan portfolios Many businesses were required to agree to changed loan conditions.
CompetitionCompetition
Australian banking customers are currently served by a wide range of providers12 Australian-owned banks; 9 foreign-owned bank subsidiaries; 35 foreign bank branches11 building societies more than 100 credit unionsMoves to strengthen the mutual sector to promote competition
What Are Banks Looking For?What Are Banks Looking For?
Business Plan Sources of Repayment Company Balance Sheet Company Income Statement Personal Statement of Net Worth Personal and company tax returns ASSETS and ability to repay
Non bank financial institutionsNon bank financial institutions
What are NBFIs ?
No banking license or not supervised NBFIs facilitate bank-related financial services, such as investment, contractual savings, and market brokeringExamples of these include insurance firms, pawn shops, currency exchanges, and microloan providers
What are some Alternatives?What are some Alternatives?
In addition to banks / non bank financial institutions:
Angel Investors or Venture Capital CompaniesAsset-Based LendersEquipment LeasingPurchase-Order FinancingStock financingA/cs receivable - Factoring Companies A/cs receivable - Invoice Discounting
Who do they finance?
New companies with cutting-edge idea or product
Newer companies with business plan
Venture CapitalistsVenture Capitalists
What are they looking for?
An opportunity to make a good return on investment
Usually will want an equity position and many times a management or controlling position
Sometimes will finance with loans
Venture CapitalistsVenture Capitalists
Have to have assets!
Real estate Machinery Patents or trademarks Inventory Receivables All of the above
Asset-Based LendersAsset-Based Lenders
Asset-Based LendersAsset-Based Lenders
What will it cost?
The amount charged will depend on the amount and quality of your assets
Typically it will be more than a bank would charge
Remember, your bank has declined to finance your business
Equipment LeasingEquipment Leasing
How does it work?
Manufacturing or office equipment Leasing company purchases equipment and
“rents” it to you Opportunity to purchase equipment at end of
lease period
Purchase Order FinancingPurchase Order Financing
How does it work?
Obtain official Purchase Order from your customer
Customer has to have good credit Find a reliable supplier/manufacturer for your
product, domestic or foreign Place order with supplier/manufacturer
FactoringFactoring
What is factoring?
Loan money using accounts receivable as collateral Usually with recourse to company and company owners Usually requires that all receivables be pledged With or without notification to your customer Manages collection of accounts Speeds up cash flow
What does it cost?
How much advanced depends on credit quality of A/R Interest rate depends on credit quality of A/R Fees imposed for collection service
FactoringFactoring
Invoice DiscountingInvoice Discounting
How Does It Work?
Simplified factoring Single or multiple invoices Is not usually credit management or accounting Is not usually collecting debts Credit quality of customer is most important
SummarySummary
Traditional bank financing cheapest Banks normally require property security Landscape has changed Different types of alternative finance Choice and mix depends on need, cost, position in
company history
The $64,000 QuestionThe $64,000 Question
How do You FindAlternative Financing Companies
The Internet / Yellow Pages Brokers Business associates