If you are a start-up or in the development stage you know how hard it is (if not impossible) to obtain financing from the well-known traditional sources. Banks may require a certain number of years of profitable operations, collateral and a personal guarantee before making a loan. You may not be big enough (or want to be) or have the growth potential that venture capitalists require, and even if you do you may not want to accept the oversight that many venture capitalists demand. Your Angels, on the other hand, may not be able or willing to provide you with all the funds you need on a timely basis and may expect a bigger piece of the pie than you want to give up.
There are alternatives residing in a lesser-known model that some entrepreneurs are successfully employing. Under this model, a company receives a loan and pays it back over time out of the revenues that it earns. Thus, a company can avoid the burden of a fix payment schedule which it may or may not be able to meet depending on its cash flow. Furthermore, since this model involves debt financing there is no dilution of the owner’s equity position.
Three companies highly involved with this model each have a slightly different spin and focus:
Lighter Capital, a Seattle base company, lends to high-growth, high-margin start-ups, that are looking for a capital infusion to boost growth. Lighter likes the software industry. The loans are paid back via a percentage of operating revenue. This B.J. Lackland, Lighter’s CEO, says aligns the interests of his company with the borrower. The faster the borrower grows the faster the loan is paid off. Lighter, a former venture capitalists and Angel investor also brings valuable experience to his clients.
Kabbage, based in Atlanta, concentrates on merchants who sell online. Kabbage claims to have made 30,000 cash advances to companies over the past year and that a merchant can obtain a decision within seven minutes of applying. The advances are typically made to finance inventory purchases and Kabbage is paid back principal plus a fee as inventory is sold. The longer it takes the merchant to pay back the advance the higher the fee. Fees range from 2 to 7 percent.
American Finance Solutions, based in Anaheim, California, says that half its loans are made to start-ups with loans ranging from $10,000 to $500,000. American Finance advances money based on the volume of its clients’ credit-card transactions. Loans are repaid, along with fees, by deducting a set amount from the credit-card transactions that its clients consummate.
The above is based upon an article written by Kent Bernhard, Jr., Money & Finance Editor – Upstart Business Journal