The other colors of money: if banks and VCs are out of your financial picture, don't despair. These 3 alternative sources of capital could provide the funding you're looking for

Entrepreneur, July, 2004 by David Worrell

A quick Web search will help you find a local angel group near you. Or just ask around--most CPAs and business lawyers will know somebody who's involved in your area.

BLUE SUITS

When your growing company is facing a cash emergency, it helps to go to someone who understands the dynamics of growth. Traditional bankers, who are generally looking for something "slow and steady," are probably not your best resource in this case. That's where a commercial finance company can step in.

"In general, commercial lenders will look at tougher loans, because they are not subject to the same regulations as a bank," says Douglas Mitman, managing director of investment bank Grace Matthews in Milwaukee. The more critical your need, the less useful banks become. "The commercial finance guys can be more aggressive with a struggling company," says Mitman. "But they're typically going to look for asset coverage."

"Asset coverage" is essentially another way to say "loan collateral" and can include accounts receivable, inventory and factory equipment.

While finance companies may have less stringent rules than banks, they still look for one of two things: either hard assets to use as collateral or enough cash flow to comfortably make debt payments. If you have the collateral, look for "senior" or "asset-based" loans. If you can afford to pay back the loan from cash flow but don't have hard assets, ask about unsecured, mezzanine or subordinated loans. Rates these days are roughly equivalent to those of a credit card.

Subordinated and unsecured credit are now widely available to businesses that have solid operating profits--sometimes to the tune of two or three times the business's annual cash flow.

CIT Small Business Lending Corp. (a subsidiary of CIT Group Inc.), for one, provides SBA-guaranteed loans of up to $2 million based not just on assets, but also on the company's operating history and the strength of the business plan. "We're looking at the projected cash flow--the ability of the business to repay us. And we put a lot of weight on what the business has done in the past couple of years. But it's not uncommon for us to lend based on projections, too," says Chris Lehnes, vice president of business development for CIT Small Business Lending Corp., based in Livingston, New Jersey. Franchises, professional offices and others with proven business models are most likely to qualify for credit based on projections.

For lending companies like CIT Small Business Lending Corp., seeing businesses with a substantial amount of debt is not uncommon. In fact, according to Lehnes, private businesses frequently have leverage ratios as high as 10-to-1--meaning they have 10 times as much debt as equity. "That would be outrageous for a public company," he says, "but for a small [or midsize] business, that's very common."

While the biggest commercial finance lenders include CIT Group, GE Commercial Finance and Textron, there are also hundreds of smaller shops. Some of these lend SBA money through what's called a Small Business Investment Corporation.