Finance for SMEs

Sources of Finance for Small Business “Alternative Finance”

Overview

     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 SME

   No single universally accepted definition of a small or medium sized enterprise Generally based on turnover, number of its employees, borrowings or a combination thereof

Initial 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 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?

   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 get

   Fallout from GFC changed the risk profile of most businesses Banks undertook to mitigate their risks with a review their loan portfolios Many businesses were required to agree to changed loan conditions .

Competition

     Australian banking customers are currently served by a wide range of providers 12 Australian-owned banks; 9 foreign-owned bank subsidiaries; 35 foreign bank branches 11 building societies more than 100 credit unions Moves to strengthen the mutual sector to promote competition

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 institutions

What are NBFIs ?

   No banking license or not supervised NBFIs facilitate bank-related financial services, such as investment, contractual savings, and market brokering Examples of these include insurance firms, pawn shops, currency exchanges, and microloan providers

What are some Alternatives?

In addition to banks / non bank financial institutions:        Angel Investors or Venture Capital Companies Asset-Based Lenders Equipment Leasing Purchase-Order Financing Stock financing A/cs receivable - Factoring Companies A/cs receivable - Invoice Discounting

Venture Capitalists

Who do they finance?

 New companies with cutting-edge idea or product  Newer companies with business plan

Venture 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

Asset-Based Lenders

Have to have assets!

      Real estate Machinery Patents or trademarks Inventory Receivables All of the above

Asset-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 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 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

Factoring

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

Factoring

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

Invoice 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

Summary

     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 Question

How do You Find Alternative Financing Companies    The Internet / Yellow Pages Brokers Business associates

Internet Resources

 Search for these terms ◦ ◦ ◦ ◦ ◦ Asset Based Lenders Equipment Leasing Companies Purchase Order Financing Factors Invoice Discounters