Customers or suppliers can be a source of business financing

Entrepreneurs may have noticed that many banks and other conventional lenders have become far more cautious since the 2008 financial crisis, and many business owners are turning to alternative sources of capital to secure the money they need to expand and grow their commercial ventures. Venture capitalists and angel investors have long been a popular source of funds for cash-strapped entrepreneurs, but financing may sometimes be available from suppliers or customers as well.

The upscale supermarket chain Whole Foods is one company that has set up a loan program to provide funds that small businesses can use to expand their operations or purchase new equipment. It has made loans totaling over $18 million to more than 235 of its suppliers since starting the program in 2006, and several other large companies have launched similar initiatives.

This kind of financial arrangement can provide public relations benefits to both the lender and the borrower. Lenders could gain added recognition and respect by showing that they support small and medium sized businesses, and the entrepreneurs borrowing the funds may find that being associated with a major company raises their profile and opens door for them.

While alternative sources of capital may often be attractive to business owners, the terms and conditions should be reviewed closely. Attorneys with experience in this area will likely be aware that entrepreneurs are often optimistic and focused on growth, and they may not always take into account that economic conditions may worsen or new competitors could emerge. Experienced legal counsel can review proposed financing agreements and suggest caution if they leave their clients too much at the mercy of an important customer or supplier.

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