The recession has restricted the ability of many small businesses to obtain traditional bank financing. Until commercial lending loosens up, here are seven alternative ways small business owners can access capital to stabilize and grow their businesses:
Sell a minority stake in the company: Large companies typically have numerous owners. Many large private companies go public by offering stock for a minority share of the business. Why should only large companies enjoy those benefits? While a public offering for small companies is probably not feasible in most cases, selling a minority share of the company to a private individual could be the answer.
Look for a new business partner among competitors: Maybe it’s time to view strong competitors in a different light. After all, if they’re that good, they must be doing something right. Perhaps, there could be some synergies two organizations could realize by joining forces. If so, a merger might be good for both companies. The right partner and merger terms could offer access to capital while allowing business owners to remain involved in day-to-day operations.
Leverage an existing strategic business relationship: Some companies offer specialized subcontracting work for larger companies on a regular basis. If both companies are happy with the relationship, perhaps there’s an opportunity for the larger company to take an equity interest in the subcontractor. Or maybe the larger company can provide short-term working capital for upcoming projects.
Factor receivables: Many small companies could see accounts receivable stagnate with the economic downturn. Factoring receivables can provide an immediate cash infusion and let owners focus on generating new business, not collecting money for products or services already sold. These days, a bird in the hand is worth two in the bush.
Leverage supplier relationships: Most suppliers don’t want to see their customers go out of business any more than small business owners want to throw in the towel. Since there’s a mutual desire to get through tough times, try reworking supplier agreements to delay payment, reduce unit costs and create special customer promotions. If suppliers can help sell more, both organizations benefit.
Explore non-bank financing options: Banks aren’t the only source of money these days. More and more credit unions are getting into commercial lending and there are several so-called peer-to-peer lending networks actively involved in lending money. Some credit card companies are even doing small commercial loans. Sam’s Club is working with a non-bank lender to provide small commercial loans to Sam’s Club business members.
Convert unused assets or capacity to cash. Almost every business has some sort of asset or excess capacity that’s not being fully used. If so, think about turning it into a source of cash. Sell excess inventory, supplies, furniture or fixtures. Sublease excess space, even if it’s merely to allow another firm to store their equipment, inventory or records. Subleasing excess retail space within a store doesn’t necessarily mean the sublessee has to be a retail operation.
Thinking outside the box should be a normal mode of operation for any savvy business owner. And that goes for meeting funding and financing needs as well. Accessing capital shouldn’t be restricted to just borrowing money or selling off a piece of the company.
Exploring options for raising cash should include leveraging relationships, assets, capacity and anything else of value to others.
Until commercial lending provides a more predictable source of small business capital, taking advantage of a wide range of possible alternative opportunities to access capital could offer the next best solution.
Daniel Hannaher, the U.S. Small Business Administration Region VIII administrator, works out of Denver. Reach him by e-mail at Daniel.Hannaher@sba.gov.