THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, September 18, 1995 TAG: 9509160190
SECTION: BUSINESS WEEKLY PAGE: 05 EDITION: FINAL
SOURCE: BY JANET DUNPHY, BUSINESS WEEKLY
LENGTH: Medium: 60 lines
Factors, once a prime source of credit for retailers, have become a $96 billion lending market across the United States.
That makes factors a leading source of alternative financing for growing companies, said Bill Holloran Jr., executive director of the Small Business Development Center of Hampton Roads.
Alternative financing options for firms on the edge of innovation, particularly technology and manufacturing firms in need of a cash infusion, will be discussed by Halloran in a seminar Wednesday at BizExpo 1995.
The annual business exposition will be Tuesday through Thursday at the Virginia Beach Pavilion.
``Technology firms typically grow a little differently from mom and pop businesses,'' Halloran said in an interview. ``The key for small business owners is understanding funding options and what they cost.''
Rather than first look for factors, Holloran advised small businesses in search of financing to initially approach a bank, which he referred to as the low-cost lending alternative. ``If you can qualify for a bank loan, you should take it,'' he said.
Banks, however, have the most strict underwriting requirements, which can pose problems for small, growing firms. Also, banks often want to see the results of a full operating cycle, or a year of activity, before they will make commercial loans.
But asset lenders and factors are willing to take a larger risk than banks, Halloran said. ``They usually charge a higher rate of interest than a bank but have more flexibility in collateral and loan agreements,'' he said.
Asset lenders and factors are also better at getting top dollar for collateral should the business fail, which is something the banks don't take the time for.
``Factoring is not a loan as much as it solves a cash flow problem,'' Holloran said. Even successful businesses may get paid only every 30 or 60 days. If expenses come due in the meantime, cash can be a problem.
A factor operates like a line of credit and can usually quickly decide whether to provide the cash. For example, a merchant obtaining cash from a factor finances the loan based on its receivables, which is the money owed by the merchant's customers. This allows the factor to rely on the financial strength of the customer, particularly if it's a large corporation, rather than on the financial strength of the borrower.
Equity financing is a funding alternative for the business owner who doesn't mind giving up a share of the profits. The most popular source of equity financing is the private investor, who typically owns a percentage of the business and takes the same percentage of profits.
Other sources of equity financing include mezzanine financing organizations, which are structured with a combination of debt and equity, and venture capital funds.
The U.S. Small Business Administration also guarantees and, to a lesser extent, makes loans. The 504 program targets real estate, equipment and land businesses, while the minority loan program makes loans up to $25,000. by CNB