Specialty finance structures have been around since the beginning of finance, but in the last several years, as bank lending remained frozen following the financial crisis, alternative financial product offerings have exploded. A few of the most common and most innovative are discussed below. The biggest advantage of alternative finance is that you can find a product that very specifically matches your company’s need, and the cost of the financing is related to value of the project. For example, you don’t have to raise expensive equity to purchase 3 delivery trucks or a CNC machine.
Equipment finance is one of the most common forms of specialty finance. A lender provides the company the capital to make a large capital purchase; the company then makes monthly, quarterly or annual payments, and the lender maintains the equipment as collateral. Almost all major banks, as well as independent specialty lenders provide equipment finance. This is exactly the same as the financing you receive when you opt to finance the purchase of a new car, and often times equipment finance is for vehicle fleet purchases.
Merchant cash advance
This structure is targeted on businesses that do high credit card sales volume. The lender provides up front capital in exchange for a fixed percent of each day’s credit card transactions until the loan plus interest is repaid. These loans and advances are usually less than six months and expensive on an annual percentage rate-basis. This form of finance has come under fire recently for being usurious and predatory, so do your homework on this one, but it can be a good fit for a store looking to expand its physical space (although you may qualify for a cheaper bank construction loan) or inventory offering. OnDeck Capital offers a small business loan that is similar, but with some key differences to conventional cash advances.
Kabbage, provides capital for people and companies that sell products via online platforms like eBay, Amazon, etsy and buy.com. If you have an ecommerce web store on one of these platforms, this is an efficient way to obtain capital to purchase your goods at wholesale.
RBF is an entrepreneur-friendly loan, where repayments are based on a percentage of monthly revenue. Payments are therefore not fixed, but instead fluctuate with your company’s business cycles. So the lender takes the risk that business might slow, but benefits via higher payments when the company grows. The loan is terminated when the principal amount is repaid plus some agreed upon, fixed interest amount, usually called a “cap.” RBF investments can be as little as $25,000 or as much as tens of millions of dollars. The model features no equity dilution, no personal guarantees and much less strict financial controls than a bank loan.
RBF is a good fit for a company that is growing and needs capital to grow faster. Uses of funds that drive new sales are key to the equation, as investor and borrower are aligned on revenue growth. Acceptable uses of funds are hiring a sales person(s), launching a marketing campaign or buying a booth at a big industry conference.
My firm, Lighter Capital is one of the most experienced providers of revenue-based finance. There are also RBF funds, like Capital Royalty, that specialize in specific industries, like bio-tech and life sciences.