Alternative Lending Sources to Assist your Small Business
Small businesses are often hit the hardest during economic recessions. Since 2008 especially, banks have become more cautious about their lending policies and it is often difficult to secure traditional loans for businesses. Fortunately, there are alternative lending sources that can be particularly beneficial for small businesses. They often provide more immediate cash flow and eligibility is usually based on sales and customer credit, rather than on the business owner’s credit.
For small businesses that own heavy equipment, a sale-leaseback is an effective financing method. This involves selling equipment to a lender, who then leases it back to the business. The business is able to keep the machinery and also acquires an immediate inflow of cash. Moreover, by strategically selling and leasing back assets that depreciate in value, the business can usually write-off monthly lease payments.
Purchase Order Financing
Some small businesses require alternative lending to meet the purchase needs of their customers. This often applies to importers and exporters which need to make immediate payments to secure raw materials but may have to wait one to two months for a customer’s credit card transaction. A financer then agrees to sign a line of credit or make a cash advance to the business against a signed purchase order. While the financier usually takes a portion of the gross margin of the order, eligibility for this type of lending depends on the customers’ credit rather than the business’s.
Factoring is an alternative lending source that differs from a traditional bank loan, broadly in the sense that while banks look for cash flow returns, factoring is collateralized lending. The major benefit is that factoring companies pay the small business immediate returns on invoices so that the business does not need to wait for customers to pay their credit card bills. There are fees and interest rates that make factoring more expensive than traditional loans, but it is typically a good option for small businesses that are expanding quickly and need immediate cashflow.
Merchant Cash Advance
If a small business accepts credit card payments but the owner has a less-than-lendable credit score, a beneficial form of financing is a merchant cash advance. This entails that a lender pays the business a lump sum upfront in exchange for a portion of future credit card sales. Unlike a bank loan, there are no set monthly payments or due dates. The lender may take up to 17 percent of credit transactions, and as long as the payments are made on time, the advance may be renewed.
When small businesses struggle to qualify for traditional bank loans, there are alternative lending sources that can subsidize expenses. It is important to carefully consider their pros and cons and choose one that is best fits the needs of the business.