How Can Alternative Capital Help My Business?
Capital fundraising is simply cash raised by business to fund operations, acquisitions and expansion, asset purchases, typically through debt structures. Debt options for larger companies include bonds, debentures, and commercial paper. The most common debt instrument comes in the form of loans from financial institutions, capital funds, venture capital organizations, and private investors.
Why Alternative Capital?
To understand the growth of the multibillion-dollar alternative capital industry, one must take a quick look at history.
Prior to 1935, bank “panics” were not uncommon in the US, due to economic volatility and very little government banking regulation. However, the Panic of 1893, where more than 600 banks and 16,000 businesses failed, as well as the Great Depression of 1929 which saw more than 4,000 banks fail and 5,000 businesses go under in the ensuing years, compelled Congress to take action.
In 1933, the Glass-Steagall Act was passed to protect bank depositors’ funds through the creation of the FDIC. With this legislation came substantial government bank regulations and oversight. These laws necessarily restrict the types of investments and levels of risks banks may take with depositors’ money. Over the years, these state and federal banking regulations, along with equivalent laws for savings banks and credit unions, have become more and more restrictive.
With the advent of the internet, sophisticated investors began developing non-bank loan products as alternative capital sources for both businesses and consumers. Thus, alternative capital was born, and has since grown into a multibillion-dollar industry with thousands of lenders. Alternative capital lenders are continuously developing new services using cutting-edge technology to offer competitive rates to their clients. Businesses that may not meet the lending requirements of financial institutions or pose a risk to the restrictive regulations placed on banks now have myriad options to pursue.
How Does the Alternative Capital Industry Work?
The alternative capital industry is lightly regulated in most states, adhering to the basic laws governing business transactions, usury, and contracts. Because these firms use investor and/or proprietary funds, they are able to take on any level of risk deemed acceptable and charge their appropriate rates and fees for their perceived risk.
Huge Economic Benefits
Many heretofore “unbankable” businesses, developers, startups, and historically high-risk ventures are accessing capital at historic levels. Private firms may charge higher rates and fees than are common in the traditional financial institution marketplace. The alternative capital loan industry generally uses a higher margin strategy, so capital from these sources remains available during downturns in the US economy when banks and credit unions tighten their credit requirements. This is a huge benefit to companies that are sensitive to volatility in economic cycles, as well as businesses that need capital in a down economy, like what we are experiencing now.
The cost of capital is obviously a key component of business operating profits. But without that capital, companies cannot maintain operations. Alternative capital has proved to be a benefit to thousands of businesses, many of which must weigh the rate of return for higher-priced capital vs the outcome if precious cash cannot be reasonably acquired another way. And, once the borrower’s financial condition trends positive, cheaper capital is consequently available.
To learn more about how alternative capital can benefit your business, contact our offices today.