Businesses that have the right capital partners (lenders or investors) have a better chance at succeeding in the marketplace.
Capital partners come in three broad categories – Traditional, non-traditional and equity providers. Each category of capital partners provide advantages to entrepreneurs, depending on their goals, cash flow, and growth plans. Each category of capital providers has a specific risk profile of businesses they will partner with in the marketplace.
The BBRC will help you identify the capital provider that best fits your business needs. Most businesses tend to focus on traditional debt providers (mostly commercial banks), although non-traditional and equity providers can also be viable business lending options.
Here are the three types of capital providers – and who their target business customers are:
Traditional Capital Providers – Businesses with stable predictable revenue and profit.
Commercial banks fall into the traditional capital providers’ category and are historical cash flow and asset-based lenders. These financial institutions seek to provide capital to businesses that have produced stable, predictable revenue and profit. Commercial banks are more risk-averse than other capital partners and, as a result, the cost of capital is cheaper than other capital providers.
Banks tend to lend to stable industries and entrepreneurs with documented, proven historical cash flow. Commercial banks are hesitant to lend to firms or industries with a history of revenue and profits fluctuating, rising up and down irregularly. When revenue and profits fluctuate, banks cannot adequately forecast the repayment of interest and principal. If your business has stable, predictable cash flows, traditional debt providers may be the best fit for your business. The BBRC has strong relationships with various banks, and we will help you determine the lender that best fits your capital needs.
Non-Traditional Capital Providers – Businesses with unpredictable revenue and profit.
Non-traditional capital providers include non-profit and for-profit entities that will lend capital to businesses that have unpredictable revenue and profits. Since these businesses have a greater risk profile than what traditional capital providers will lend, the cost of getting a loan from non-traditional capital providers is generally more expensive. Non-traditional capital providers make up a broad array of lenders. Examples include micro-lenders, business invoice factoring lenders, crowdfunding lenders, and peer-to-peer lenders.
Micro-lenders are typically non-profit organizations that receive loans from the U.S. Small Business Administration (SBA), and in turn use the capital to make small loans to small businesses in the communities they serve. The BBRC has cultivated many relationships with micro-lenders who provide much-needed capital that typically cannot be accessed through traditional means.
Business invoice factoring lenders will pay a business owner upfront a percentage of an invoice if the business cannot wait 30, 60 or 90 days for payment from a customer. Invoice factoring lenders play a valuable role for small companies who need to have cash flow freed up to meet other needs and cannot wait 30 to 90 days to be paid by their customers.
Crowdfunding and peer-to-peer lenders are relatively new and are leveraging platforms on the Internet to pair business owners with providers of capital in an expedited timeframe. Both crowdfunding and peer-to peer lenders provide capital to clients by raising small amounts of money from a large number of people willing to invest in the business. They use online services that match investors with borrowers.
Equity Providers – Start-ups and businesses with unpredictable revenue and profit.
Of the three types of capital providers, equity partners are the most expensive but also the most flexible. Equity investors, in exchange for their capital, receive shares of stock or an ownership percentage of the firm. With equity, the cost of capital refers to the claim on earnings provided to shareholders for their ownership stake in the business. The equity viewpoint emphasizes growth and is therefore more risk tolerant.
Equity partners include angel, venture capital and private equity investors.
Angel investors are high net worth individuals who lend capital to start-ups and small businesses.
Venture capital investors lend money in exchange for a stake in the business, typically after angel investors validate the success potential of the business concept.
Private equity investors typically invest after venture investors provide capital that can take the business to the next level. Private equity investors include individuals and funds that also have a stake in the business venture.
Because equity providers become co-owners of the business, they share in the profits (if there are any) and do not require a monthly payment. For some entrepreneurs, this is extremely beneficial because it enhances cash flow and provides owners a better opportunity to allocate capital in its highest and best use within the business. Equity investors bring an added bonus in that they are true partners in the business who can provide leadership expertise and experience essential in helping the founding owners take the company to the next level.
All of these capital partners provide benefits to entrepreneurs, but choosing the right one depends on their goals, cash flow and growth strategy. The BBRC was created to help businesses access the appropriate capital at the right time. The BBRC wants your business to be successful in the marketplace; having access to capital is a crucial part of the process. Give us a call to set up a one-on-one session or sign up to attend one of our webinars. Our BBRC staff of consultants can be reached at 205-250-6380 or via e-mail at firstname.lastname@example.org.