Preamble:
Banks have become increasingly solicitous in their
advertising for clients -- but they are not lending significant
sums to smaller businesses and emerging enterprises. Their credit
guidelines are far too stringent to make loans to either
"ordinary" Human Beings, or to "real-life" businesses.
They occasionally lend money...
They occasionally lend money...
to the government or to each other -- and so the fortune stays within the Family,
and somehow it never quite trickles down to stimulate the credit-starved private sector.
-----No; what most money center banks are doing (especially the biggest TARP recipients with
the largest portfolios of 'toxic assets') is pruning back credit lines, charging higher fees than ever in history for more "things," and holding our savings and demand deposits for ransom.
By the way, the rate of interest which you may actually earn on your funds, reduced by the
incidental costs, fees, penalties, miscellaneous charges and other whittlings which you incur for
the privilege of banking actually comes out to a net loss on your part, versus the rate of inflation.
As grandpa would say, "you'd be better off putting your money under the mattress." - He wasn't quite right then, but he was certainly a visionary after surviving The Great Depression in the US.
As grandpa would say, "you'd be better off putting your money under the mattress." - He wasn't quite right then, but he was certainly a visionary after surviving The Great Depression in the US.
-----
De-Banking The Business Sector - Alternative Capital And Credit Strategies
A NEW RESOURCE: Alternative, Non-Bank Sources of Capital and Credit
Note: This article was written by Douglas Castle, the Chairman and CEO of TNNWC Group, LLC (a provider of services to entrepreneurial enterprises, small businesses, and small- to middle-sized companies with aggressive plans for growth) for simultaneous publication in The Global Futurist Blog, The TNNWC Supplemental RSS Feed and Daily Email Blog, and the Expert Advice and Insights from TNNWC Blog. It may be re-published without permission, provided that it is published in its entirety, bearing this Note (at either the beginning or the end of the article), with all images and hyperlinks left intact and live. Attribution must be given the Author by name.
Synopsis Of Article: Where to go and what to do when the bank won't lend your small or growing business any money, or extend any credit.
Some of the best (and most likely to proliferate) non-bank alternative credit and capital strategies are discussed briefly below. Some are untested. Some, if not done in precise compliance with the exact letter and supposed intent or spirit of the law (as complicated as those things can be to understand or anticipate...or as the courts would say, to interpret), will invariably cause you to become a dartboard for overzealous and ambitious prosecutors.
And some of these small business credit and capital strategies are merely ingenious products born of a combination of necessity and some applied common sense. They are well-established, tried and true, but are not altogether that well-known to the "mainstream" business community.
But hoping that the banks will get back into the business of real-world business lending may prove to be every bit as foolish as closing up shop while waiting for this to actually happen.
Entrepreneurs, by their nature, are innovative problem-solvers. One of the biggest problems facing emerging enterprises at this moment is the lack of available capital and credit through banks and conventional resources. In this article I will present some interesting possibilities, each worthy of examination. A continued lack of capital and access to credit is not an option...
Notice: Please bear in mind that the information provided below does not constitute, and must not be construed by the reader as being investment, financial, tax, accounting, legal or other professional advice. Neither the author, nor any of the publications featuring this article provide investment, financial, tax, accounting, legal or other professional advice to readers or other third parties under any circumstances.
Following is a summary of the some of the options and opportunities, as well as some links to more detailed reference materials which can either be obtained from the web, or which can be downloaded as printable .pdf files for your use.
CROWDFUNDING
At present, most CrowdFunding efforts yield relatively small sums of capital (i.e., anywhere from US$5,000.00 to US$150,000.00) in very small increments (i.e., anywhere from US$100.00 to US$5,000.00) from any number of investors or patrons. It is, if properly planned and implemented, a means for an ambitious company to raise a small early-stage round of financing without having to: 1) approach and engage in an elaborate and often time-consuming courtship (sales cycle) with angel investors, venture capitalists, investment bankers, government agencies or commercial banks; 2) spend large sums of money -- principally legal fees, compliance fees and production costs) on preparing Private Placement Memoranda (for private offerings to a limited number of specially qualified, “accredited” investors) or Sales Prospectuses (for initial public offerings); or 3) sacrifice a tremendous share of the company’s ownership and control to outside parties at an early, vulnerable stage in the company’s life cycle.
Most participants in CrowdFunding campaigns are non-wealthy, non-institutional individuals who simply believe in the management, objectives or intentions of the offering entity. Many of them are, in fact, entrepreneurial individuals who would like to participate in other entrepreneurial companies for either altruistic reasons, or to obtain a direct return on investment from a private company, assuming that the company is successful.
It is a very straightforward approach which allows adventurous private sector investors or participants an opportunity to directly participate in the bootstrapping and profitability of potentially successful ventures. There are virtually no price barriers to entry (small sums are invested per participant), catastrophic risks (while there are risks inherent in every investment, if the amount being invested is less than the cost of dinner and a show, a loss of the entire investment would probably not have significant adverse consequences to the investor.
The mechanism is incredibly simple. An entrepreneur, executive or spokesperson of an emerging enterprise or growing business makes an offer (generally in the form of a brief request or polite solicitation followed by some additional information to those parties who indicate that they may be interested in participating) to the public through postings on various social media groups, opt-in subscriber lists, business networks, blogs, websites and other internet-based communications forums to raise money for some specified purpose. If the purpose is to raise funds specifically for investment in the issuing entity, and if the investor is not involved in the management or affairs of the company, one potential complication might be the need for compliance with federal regulations and state laws governing offerings of securities. If you are, in fact, making an offering of securities, you must make the necessary regulatory and state (“Blue Sky”) filings.
My prediction is that CrowdFundings are going to become more popular, and will be approaching larger maximum raised amounts. This bodes well for companies wishing to acquire operating capital without getting involved in the expense, time-consumption and compliance requirements of public securities offerings or private placements to Accredited Investors.
To obtain a downloadable .pdf about some of the existing and contemplated techniques of CrowdFunding, visit http://bit.ly/CrowdFundingWP3 .
VENDOR/SUPPLIER AND CUSTOMER CREDIT
While they may not be a source of funds for infusion, a vendor or supplier which offers longer credit terms (i.e., instead of net payment in 30 days, perhaps net payment in 90 days) is creating a cash flow advantage for your company in allowing your receivables to be collected and converted to cash before that vendor or supplier requires a payment (an outflow) of funds from your business. In a difficult economy where sales are difficult to make, both to consumers and in business-to-business transactions, an offer of an extended time to pay or the opportunity to obtain installment terms (offered directly by the vendor or seller) makes the offeror a much more attractive source for any purchaser.
In negotiating with economically-challenged vendors, economically-challenged smaller businesses are going to gravitate toward those vendors and suppliers offering extended or installment payment terms. In many cases, a slightly lower standard of quality might even be more than compensated for, or offset by generous payment terms -- this practice will make it increasingly hard for smaller, cash-constrained vendors and suppliers to remain competitive, and will likely force some of the marginal participants out of the race entirely. What is being done here is a basic form of vendor self-banking, eliminating the need for third-party banks to provide credit to their purchasers.
Customer credit is quite the opposite case. It entails having the customer advance a certain percentage of the cost of the product or service to the vendor or supplier prior to that product's or service's being delivered. There must be significant trust on the part of the purchaser or end consumer that the pre-paid supplier or vendor will be able to perform and deliver the goods or services as and when promised. The risk here is principally "performance risk," where in the supplier or vendor credit scenario spoken of previously, the vendor was assuming more of a direct "credit risk." These are two very different types of risks and must each be evaluated very differently, as well.
Supplier or vendor financing tends to work well with relatively high markup items being sold to a very large and diverse audience of buyers, none of whom represents a substantial percentage of the supplier's or vendor's revenues. This is a variation on the tried and true notion of credit or portfolio diversification. Ironically, banks once took this investment management appraoch very seriously.
Customer credit (advances by the customer to the supplier or vendor) tends to work best in situations where the customer is financially strong and the supplier or vendor is more tenuously capitalized, but has a certain custom item or service of rare or exceptional technical specifications which it can supply. In these cases, the customer or purchaser is actually capitalizing the manufacturing or service-rendering process in place of a commercial bank's providing of working capital or a credit facility to the small business vendor. Some of these arrangements may, in fact spur certain business combinations in terms of vertical integration of two or more businesses, i.e., a manufacturere and a wholesaler, just as an example of one possibility.
SPECIALIZED (NON-BANK) FINANCING AND CREDIT ENHANCEMENTS
There are a number of different non-bank lenders, investors, lessors and "discounters" (parties who or which purchase assets from your company at a discount from their face or appraised value, and who or which then advance you a sum of money pending the conversion of those assets into cash through the ordinary course of business; after this, they remit to you the balance of the cash value of the asset less a portion of the discount, and less some interest charge on the original amount advanced, to you).
These individuals and companies are not regulated in the same manner as banks (or even in the same manner as hedge funds, life and health insurance companies, and publicly-traded or specially-licensed entities), and so they generally have more underwriting flexibility than banks. On the tougher side, these parties tend to be significantly more expensive than banks (using the range of rates that a commercial bank would charge for its loans, which is somewhere between Prime or LIBOR - and the fully-loaded, placement and commitment fees included, rate charged to a long-standing corporate client which was privately-owned, consistently profitable and conservatively structured in terms of debt versus the Fair Market Value ["FMV"] of its assets), and have their own discretionary terms and conditions in their contracts. Bear in mind that in dealing with these non-bank alternative providers, you'll have to do your own calculations as to the actual effective cost of funds (the "Truth In Lending Act," such as it is, does not generally apply to these resources).
It is important to note that the cost of funds may be high, but this may be quite suitable provided that your net return on those funds is higher. By way of example, I would not be averse to borrowing funds at 10% per annum if I were certain that I could invest those funds at 12% per annum; clearly, the "spread" makes all of the difference. It is equally important to note that the structure of the payments (the timing and amount of repayment of advanced amounts or for the value of a piece of equipment or a vehicle leased) must coincide with your anticipated cash flow, lest you leverage yourself into a default.
For your further reference, in this group of specialized funds providers we also have angel investors and venture capitalists (both of which look for substantial equity and occasionally administrative or managerial control of your company), factors, invoice discounters, equipment lessors, purchase order financiers, credit guarantors (for timely and full payment of accounts receivable to your company), asset-based lenders (who are generally finance companies or private funds which may or may not want a particpation in the equity or profit distributions of your company, and project financiers, which are usually banks operating in conjunction with government mandates and special government guarantees which permit them to finance longer-term, larger-ticket projects than they would ordinarily be inclined to finance based upon their regular business lending criteria.
For a free printable download of a .pdf document which details the specific characteristics, tastes, preferences and usual modus operandi of these specialized sources, please click on the following link: http://bit.ly/FinancingAlternatives3 .
STRATEGIC MERGERS AND ACQUISITIONS (In Miniature)
In order to reduce overhead costs and redundant costs through job and facilities consolidations, small businesses are combining to better leverage their fixed cost structures and to cross-sell and diversify their markets. As larger combined enterprises, these companies generally have better access to capital credit and preferred supplier payment terms.
In a combination known as a vertical integration (discussed earlier), vendors and their clients combine in order to control and contain costs more efficiently, as well as to improve logistics.
In a combination known as a horizontal integration, companies with overlapping or complementary market audiences (customers) combine to diversify income streams and to cross-pollinate sales; as in anoy other business combination, they also look to reduce fixed costs by consolidating certain job functions and facilities or fulfillment procedures.
In the current economic environment, many smaller companies are being sheparded through the combination process by introductions being brought to their attention by CPA firms, law firms and financial advisory firms, as opposed to the more traditional (and larger transaction-oriented) investment banking firms who do not find mini-mergers and small combination transactions profitable in light of their own internal cost profiles, which require that clients (companies being merged or acquired) pay very substantial sums relative to their asset and revenue sizes. Doing very large M and A ('merger and acquisition') transactions are generally much more cost effective for both the clients (which are large companies which can afford tremendous legal, due diligence and compliance fees) and investment banking houses (with their propensity for paying large bonuses and ensconcing themselves in palatial surroundings, thereby increasing their operating overhead and requirement to charge very large fees to support these customary costs.
As collaboration and cooperation become more widely promulgated through social media, expect mini- and micro-merger activities to increase as companies "circle their wagons" in the harsh banking environment.
During the next two years, I would expect to see an increase in the number of these small combination transactions, and a decrease in the number of large, multibillion dollar transactions, especially in the less glamorous industries which are not involved in major brands, new technologies, or in consolidating their oligopolies (big pharma, banking and very large multi-product industrial firms) into even more fearsome monopolies. Note: Which reminds me that I must call my cable provider (which company has a geographical monopoly here) and complain about the ever-increasing amount of down time per week which my neighbors and I experience while using their vigorously-promoted and advertised network. They are in the enviable position of not having to deliver a quality service because their customers do not have a free choice of alternative providers. This lack of competition has allowed them to reduce their costs at the expense of the quality of service to their customers, and by passing along (at a markup) these inflationary increases to their hapless, cative clients -- there are times when I miss the free enterprise system and the romantic notion of multiple companies competing for my affection - I think that the entrepreneurial challenge of competition made each of these companies stay a bit sharper in terms of their service or product quality, and made them keenly sensitive to issues of customer courtship, customer acquisition and customer retention. Price wars were a treat for their customers as well.
MINORITY/ NON-MINORITY PARTNERSHIPS
Because of certain laws, quotas and special set-asides of major government related (or just government-regulated) contracts to certain legally-designated Minority Enterprise Businesses (MBEs), and because of their access to these lucrative projects, some of the more enterprising, opportunistic and sociable non-MBEs will choose to participate with these MBEs in various types of mutually advantageous business arrangements, where they (the non-MBEs) can trade off their financial access, vendor relationships, underutilized capacity and cetain specialized expertise in consideration for a cooperative participation with these MBE's in their work to be performed pursuant to MBE mandates and incentives.
While some of these relationships will be loosely-formed simply on a contract-by-contract basis, the obvious efficiences of more intimate strategic alliances and possible business combinations will prove a catalytic economic and entrepreneurial incentive for some of these tentative co-ventures to become deeper relationships. Within the next two to three years, I believe that the US small- to medium-sized community is going to become more multi-racial collaborative, as a result of common-sense business practices being encouraged (proactively) by agencies of the US government and various state governments, and necessitated (by default) of the large commercial banking sector.
As a result, smaller businesses which are not even appearing on the rader screens of the major investment banking firms and money center banks will be growing in size, and in employee diversity. There is a certain irony to the fact that both the proponents of diversity in the workplace and those who don't even understand what diversity is about or would like to avoid any semblance of it (having subsisted for multiple generations in a very private, sequestered and racially [or educationally] incestuous world) will actually be working, albeit perhaps unwittingly, toward the same multiculturalization of the entrepreneurial sector.
Embracing diversity, especially when it yields absolute economic advantages, will always be a politically-charged issue; but the shear force of entrepreneurial ingenuity will produce a more productive and harmonious workplace. When diversity becomes a profitable business strategy (as it has already become in the US), you'll see it transistioning the employment demograpics of the entrepreneurial and small- to medium-sized business sectors as first initiators, quicker to make the necessary adaptations than the giant companies that merely diversify to palliate regulators and litigators and the people in the Human Resources Departments. Fascinating how economics can precipitate the most painless and rewarding social reforms.
PROFIT/ NOT-FOR-PROFIT ARRANGEMENTS
In similar form to the section above, for-profit organizations will be partnering (principally in the interest of acquiring funds through grants or the public largesse, or in the interest of funding the creation of technology and intellectual property) with their not-for-profit counterparts in public and private foundations as well as charitable trust. The line between cause-based organizations and profit-oriented organizations will become increasingly blurred. Expect more and more of these alliances, and also expect to witness a "branching off" of not-for-profits into for-profit ventures, and vice versa.
Trend To Watch: As the Business Sector is increasingly de-banked, expect a very different type of cross-cultural, multi-racial organizational landscape to proliferate across the nation, and across the world.
Also, be prepared to see an increase in the number and size of non-bank specialized financial sources who are increasingly active in this exciting new landscape.
Faithfully,
Douglas Castle
Chairman and CEO
TNNWC Group, LLC
http://www.tnnwc.com/
THE GLOBAL FUTURIST - http://theglobalfuturist.blogspot.com/
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