Alternative Lending |Both new and well-established businesses could always use extra working capital, and the most conventional method for getting that money is through a loan. However, many local bank offices – and even the national banks, decline most loan applications for many reasons.
For established businesses, the amount requested often exceeds the limits the bank can lend, or the type of loan falls outside of the bank’s operating restrictions. For new businesses and startups, the bank usually declines the loan application due to a lack of established credit history or a track record of revenue.
Less than 40% of all business loan applications are approved, and it can be very frustrating – especially for businesses that need working capital in order to complete projects, to grow, or that need money within a certain time frame. Because of this, many business owners have turned to the world of alternative commercial lending.
Alternative lending allows business owners to get the money they need, without having to wade through the bureaucracy of conventional loan applications only to receive a rejection notice.
There are many forms of alternative financing, but here are a few of the major methods that business owners use on a regular basis.
If a business accepts credit card payments, then a Merchant Cash Advance (MCA) is a very attractive form of alternative lending. Instead of conventional financing, where a loan is paid back in sizable monthly installments, businesses who use MCAs receive their loan, and then pay it back in the form of a flat percentage of credit card sales. For example, if a restaurant needs working capital, but cannot get financing through regular bank loans, then the restaurant can get a merchant cast advance, utilize the funding as they see fit, and then pay it off through a small portion of the total volume of credit card sales. The higher the volume of sales, the faster the MCA is paid off.
Factoring is a form of alternative financing that will not only get a business the working capital it needs, but it is a great way to streamline accounting – even businesses who do not need money use factoring. Factoring is a method by which companies sell their overdue accounts receivables to a collection company in return for cash. For example, a manufacturing company has clients with outstanding bills, but diverting time and payroll hours to have someone hunt down that money would be a waste of resources. By selling those bills to a factoring company, the business receives money (minus a percentage fee from the factoring company), and they take the headache of tracking down the owed money off of the company’s hands. Factoring is a great alternative financing method that allows businesses to receive working capital from customer bills that might otherwise not yield a single penny in a timely manner. Many businesses sell all outstanding customer bills to factoring companies after 90 days or so, just to stave off any strain on the cash flow, and to take any additional strain off of the accounting department.
For companies that manufacture goods, restaurants, IT companies, beauty salons – basically, any business that uses equipment – asset based lines of credit are a great alternative business funding method. Lenders will extend lines of credit based on the value of the equipment and hard assets owned by the business (and, by extension, the business owner). The higher the value of the assets and equipment, the greater the line of credit and access to working capital that can be extended to the business.
Sometimes business owners do not have the collateral to leverage against a traditional loan. Perhaps the business is just getting off the ground, or the business has a lucrative operation but a small customer base, or perhaps the business has very low overhead and the owner doesn’t have a house or major equipment to use as collateral. In these cases, many business owners turn to unsecured lines of credit as an alternative financing method to get working capital. Unsecured lines of credit usually have a much higher interest rate and payment terms than conventional loans, because the lender is assuming all of the risks in the investment.
One of the more popular forms of alternative lending comes in the form of crowdfunding and micro-investments. Some business owners will post their business ideas or goals online, so people and investors can give money to help the business reach its goals. Typically, these businesses will offer something in return when certain goals are met, or when certain amounts of funding are received. These crowdfunding campaigns can be risky, because the business does not usually receive any money until the total goal is reached.
Everything listed in this article is a broad overview of some of the major alternative financing options available. Working with alternative lenders, investors, or commercial financing brokers will open up a whole world of funding alternatives to conventional loans. If you own a new business and need working capital, or you have an established business and need extra money to take the operation to the next level, seeking out alternative lending options can help you reach your goals where banks may not.