There are alternative financing methods business owners can use to grow. However, I do want to caution that alternative financing should only be considered after conventional and U.S. Small Business Administration (SBA) options are deemed unsuitable.
Recently, we helped an American Rental Association (ARA) member who runs an equipment rental business with purchase order (PO)/factoring financing. This method can be a great option when large orders or contracts, in comparison to a company’s historical orders, come in unexpectedly.
For example, suppose a particular company doesn’t have the liquidity within the business to outlay the necessary cash needed to secure the raw materials or product before the shipment and invoicing to the customer. In that case, PO/factoring financing is an option. However, it should be noted that this is more expensive than the SBA or traditional equipment leasing programs.
For this type of financing to work — because of the higher cost of capital — a business needs to have proper margins to cover the fees and interest. at said, if this financing enables someone who was mainly servicing $25,000 contracts to handle $250,000 contracts, that is where it makes a ton of sense because it increases their volume and total project value substantially.
This specific company first rents equipment from big suppliers and then turns around and re-rents the equipment to government entities to fulfill contracts. Essentially, the equipment is rented twice, once to the owner of this company and then again to the government to fulfill contracts.
This entrepreneur started off with smaller deals, but recently delved into more significant contracts. Larger deals are great; they bring in more income and expand your reach in the market. However, how much strain large projects can put on your finances until the deal goes through is often not considered.
The same is true for other industries that have large orders come in that they cannot fill due to the lack of cash available to purchase the supplies needed to fulfill the order.
The owner of this company had bid on three substantial contracts compared to their past deals. Therefore, they were not able to pay for the equipment fleets upfront. Multifunding matched the owner with a lender that offered reasonable terms on an open PO/factoring facility. “Open” means that they will have the ability to draw from it whenever extra cash is needed to rent the equipment before re-renting to the government.
The finances for this type of deal would look like this:
The borrower would rent a piece of construction equipment from a big rental company for $235,000 for four months.
They then rent the equipment to a government entity for four months for $275,000. Their net is $40,000 less the cost of financing — around 3.75 percent during the PO phase, 2 percent during the accounts receivable (A/R) phase. This allows the company to get the equipment while the lender fronts the cash.
If you find yourself in a bind, reach out to your peers and other industry experts for guidance. There may be more options available to you than you thought.
Ami Kassar is the founder and CEO of MultiFunding, a Philadelphia-based consulting firm that specializes in helping business owners across the U.S. develop creative, cost-saving alternatives for their business debt needs and structure. He can be reached at ami@multifunding.com or multifunding.com.