Small Business Financing Options - Kronos Capital White Paper Series

Small business is structured around great service and product ideas.

We believe the ability to deliver long term performance is the true measure of our success.

Unfortunately, these product and service ideas come at a monetary cost that can be quite substantial. Although not as common as more typical forms of financing, factoring can provide an exceptional financial foundation for businesses during their often intense and demanding start-up and high growth phases.

There are four traditional financing options that are recognized as the most frequently used:

1. Personal cash from yourself friends or family

2. Personal debt instruments – home equity lines of credit, credit cards,unsecured loans

3. Conventional bank loans

4. Commercial finance products – factoring, inventory and receivables
financing and purchase order financing,

Personal Cash – Inevitably, this is the primary method of financing used by nearly every start-up. The principals of the company who have agreed to enter into business with one another tap their savings accounts and fund the administrative, organizational, and developmental expenses of a business. This cash infusion is the most risky, as these financial commitments will not be recouped unless and until the business is profitable/successful. Often, most initial expense assumptions regarding a business are too conservative, and the principals must then turn to friends and family for the next round of financing. When businesses fail, this creates a myriad of problems.

Personal Debt – Credit cards and home equity lines of credit are the usual second options when financing a business. Typically these options are used when the business is first beginning and the founder does not have personal savings to draw upon. These options are also regularly used when cash flow becomes tight within a business, particularly around the increase due to cyclical holiday selling seasons. If small business owners are utilizing these options to finance their businesses, often times there is not availability to meet emergency or unexpected cash flow requirements on a business and / or personal level. Additionally, the extensive use of personal credit by a business owner often times negatively impacts their credit score and makes private and future borrowing unavailable.

Traditional bank loans – Bank loans to small and medium businesses in the current market have been essentially eliminated from the market. The only businesses today that have access to new bank loans are most often the businesses that do not need a bank loan. The reason for this is quite simple; banks are trying to work through their legacy portfolios of bad and toxic loans – many of these loans are real estate related. As a result, formerly relaxed borrowing qualifications have become more strict and conservative. If small business has the ability to borrow, often the businesses bank borrowing limits are entirely insufficient to meet seasonal needs.

Factoring – Factoring has been in use for thousands of years. Unlike a bank loan, factoring involves the process of purchasing accounts receivable from a client in what is called a factoring transaction. It is a purchase, not a finance. Since it is purchased, the client will not be in a position to repay principal and interest, and there will be no debt associated with the cash that has been advanced to the client. Factoring facilities can be arranged to address year round needs or seasonal needs and can be structured to provide liquidity to a business for only very large invoices. The paper work and due diligence associated with documenting a factoring transaction is reduced when compared to a bank loan. Factoring is frequently used by start-up companies and companies in a growth phase (these scenarios are frequently avoided by the banks due to a enhanced increase in risk). Factoring is highly advisable for nearly all programs and industries and can be created for a client’s individual needs.

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