Despite an economy that has been in a modest recovery for more than three years, many businesses continue to struggle. One of the major challenges is that bank loans remain hard to come by, particularly for business owners with few hard assets, less than perfect credit scores, in industries regarded as risky or who just need funds quickly.
Hope springs eternal for a return to the good old days when banks actually competed to loan money to businesses. But this is not likely to happen anytime soon. The banking industry overall is far less interested in small-to-medium business lending than it used to be. This is a long-term trend that the financial crisis, subsequent industry consolidation, and heightened regulatory requirements only exacerbated.
So what are the alternatives for SMEs that cannot qualify for a traditional bank loan? Factoring may be an option for some business-to-business companies. A factor buys a company’s receivables and gives the company a large percentage of the value upfront with an additional amount returned after the invoices are paid off.
Small Business Administration loans and Community Development Financial Institution loans are other options, but only for a small subset of prospective borrowers.
Much of the SME lending gap over the past five or so years has been filled by merchant cash advance lending and a relatively new, related type of lending known as “revenue-based” financing. Mostly backed by private equity or venture capital, these non- traditional lenders have devised new business models that provide financing based primarily on bank statements, credit card volume and cash flow rather than a drawn-out underwriting process.
The result is that a much wider range of small businesses are receiving funds for a wider range of needs. The costs may be higher than traditional bank loans, but the application and approval process is much faster and less arduous, and loan amounts and payment terms are more flexible.
For example, a firm can provide a business owner with as little as $4,000 up to a much as $2 million in as few as five business days.
Two options to repay
Companies can choose from two types of financing. Business cash advances are repaid based on a mutually agreed upon fixed percentage automatically deducted from the merchant’s daily debit/credit card sales. When sales are slower, the business pays less. Small business loan options are also available. They are repaid with automatic daily withdrawals of a fixed amount from the borrower’s bank account.
These non-traditional funding sources aren’t for everyone. Lenders are looking for companies they can help grow. A small business struggling to hang on is not a good candidate. But what about a pizza shop that has a major equipment breakdown? The owner has good cash flow, but doesn’t have the money to pay for new equipment, and he cannot wait for a bank loan — assuming he can get one. A small business loan or merchant cash advance can fund in five to 10 business days and help this pizzeria keep the doors open.
Or how about a dental practice that needs new equipment? Or a spa in a seasonal resort location that needs to finish a remodeling ahead of the coming season? If the small business sector of the economy is to recover and prosper, I believe it will be through these new sources of capital.
Marc Glazer is president and CEO of Business Financial Services Inc., a provider of specialty small business loans and merchant cash advances serving businesses in all 50 states as well as Canada, and the United Kingdom, based Coral Springs, Fla. Visit www.businessfinancialservices.com.