James Shehigian, senior vice president at Aion Financial Technologies shares his insights on the business lending landscape. Jim brings extensive experience in the business finance space. He unpacks the different options businesses have for accessing the working capital they need to manage and grow their business — the pros, the cons, and what business owners should look out for. This is Part 2 of a two-part series. Minor edits applied for readability.
Businesses today have dozens of choices when they need additional working capital to fuel growth. One of the challenges small businesses face is cash flow gaps as they grow from a seed stage. In the business to business space, quite often if they're successful, a seed stage company will land their first large client and realize they need capital to fill the order and grow their team. In that situation, they’ll often start the process of applying for traditional bank financing. But this can take a month or longer, which puts the business at risk of losing the new opportunity.
Quite often, the business decides to raise a Series A. They sell part of their business in order to access cash and fill an immediate order. Eventually, when they go to sell their business, we often see these companies regretting how much equity they gave away very early on.
Another option is convertible debt. This is basically a term loan, but if it's not paid back within a predetermined time period, it converts into equity. In this case, the person or firm who provided the cash, becomes a shareholder.
Other alternatives include short-term loans, and these take a lot of forms. Aion does a lot of these for growing companies. A term loan means a fixed payment that is paid back over a specific period of time. Once the loan is paid down, the business owner can re-borrow that fixed amount.
Invoice factoring is another option for access to cash. With invoice factoring, businesses receive a loan for a specific invoice — typically for around 60 to 80% of the total invoice value. This provides the business with the money right away while they wait 30 to 90 days for their customer to pay the invoice. Challenges with invoice factoring include cost — it tends to be more expensive than other alternatives — and time — there is a lot of paperwork because the business is applying for a loan on each individual invoice.
Business owners can also leverage a revolving line of credit. This is often backed by assets in the business. It could be receivables, it could be inventory, or it could be other business assets. Revolving lines are advantageous to growing businesses because they scale up and down as the business ebbs and flows.
If a business needs to fill a large order one month, but not the next, their capital needs may fluctuate. Similarly, businesses with seasonality likely don't need to borrow the same amount throughout the year. Revolving lines work very well for these scenarios.
Many Aion customers prefer our revolving credit lines to the traditional invoice factoring they’ve done in the past because we consolidate all of their invoice collateral into a single line of credit. This makes it far easier to administer credit and they always know how much is available for them to borrow.
There are several factors that go into determining which type of credit product is best for a particular business situation. Some considerations include amount and timing — how much cash does the business need access to and how quickly do they need that financing? Do they need it all at once to address one particular business challenge, or will they need it over time with the flexibility to grow with them?
Business owners should look for a lender that has the ability to make quick credit decisions and understands their business well enough that if something doesn't go completely to plan they can adjust the credit offering to meet new business needs.
When a business owner is shopping for financing, I would encourage them to ask the lender about the nature of the ongoing relationship.
What is the frequency, volume, and channel through which they will be requesting information on an ongoing basis? Ask about the technology that a lender provides to their customers. They should be able to offer a demonstration so the business owner and their team can make sure that it's easy to use and they won’t need to call the support line just to simply draw an advance on a credit line.
There are probably as many ways to structure the fees for a business loan as there are business lenders. Traditionally, with bank financing, there are a lot of different fees and anyone that has shopped for a bank loan knows there is a whole schedule of application fees, commitment fees, ongoing fees for audits, and the list goes on.
At the other end of the scale what we're starting to see emerge, and this is certainly what Aion does, is a trend to make pricing very simple and very transparent.
People want to know what they're paying translated to an interest rate, but they also don't want to have to have 25 different fees that they're looking at on a statement every month.
What Aion does, is condense pricing into a very simple and transparent structure. It's easy to understand what it's going to cost. Our customers don't get a statement every month with 25 different fees for everything they did on our platform, or every advance that they drew on a credit line, for example. And they really appreciate that.
Because we charge this way, our customers understand at all times what their credit is going to cost them and they don't have big surprises at the end of the month when they add up all of their finance expenses.
Aion provides non-dilutive capital to help businesses cover operating expenses and fuel growth. We offer short-term loans and revolving lines of credit. Our pricing is competitive and we’re able to support younger businesses that may not qualify for traditional bank loans. We work closely with each applicant to understand their unique business needs and help them determine the best solution. To learn more about Aion Capital, connect with a lending expert on our team. Or, apply now to start growing your business.