Since 2008, the number of sub-$250K commercial loans has declined. In recent months, things are not looking much brighter; from February 2015 to May 2015, the total value of loans has also declined by 16 percent. In addition, some banks even refuse to lend to businesses within certain industries or annual gross revenue of less than $2MM, which accounts for over 70 percent of businesses in the US.
Due to an increased regulatory environment and new capital requirements, banks are less likely to loan business small amounts, according to Charlie Tribbett, co-founder of alternative online lending company Bolstr, based in Chicago.
So where does that leave the average small business owner when looking for a loan or cash of any kind? Fortunately, there are lots of alternatives to traditional bank funding.
Here are some great ideas for where to turn when your bank says no, as well as the pros and cons of each.
Alternative Online Lending Companies
The alternative online lending space is booming with companies that want to fund your venture (think OnDeck Capital, Kabbage and LoanMe). In fact, the crowd at the annual LendIt conference is up to 2200 attendees this year from 350 in 2013. If that doesn’t convince you, consider the $9 billion of loans issued in 2014, which is up from $3.4 billion in 2013.
Some of these companies only lend up to a certain amount, so if you are looking to borrow more than $100K, you’ll want to keep that in mind.
Tribbett explains that online lenders use technology to be more efficient, which opens the door to working with smaller companies. The application process is also much shorter than that of a bank loan. This allows businesses to apply, get terms, and access funding in as little as a week.
These are all appealing benefits.
In addition, some providers, like LoanMe, also have a 10-year amortizing loan available with only monthly payments required.
But just because there are a lot of eager alternative online lenders out there, doesn’t mean you can afford to skimp on due diligence and careful planning. The cost of a loan from an alternative lender can be very high, so go in with your eyes wide open.
Define the reason you need a loan, advises Sam Graziano, CEO of NYC-based Fundation: “Are you expanding? Are you looking to increase marketing to gain more market share? Read the fine print. Is the interest on your loan annualized or is it simple interest? The difference in costs could be staggering. Be prepared to ask the lenders questions.”
Finally, you’ll still need to gather some documentation before starting the loan application process such as bank statements, driver’s license and voided check. This type of lending typically is a much quicker process than traditional lending.
Crowdfunding sites like Kickstarter and Indiegogo is a prime example of the changing shift of our economy. When marketplaces are better at providing funds than traditional banks, we now realize we have an on-demand economy. The waiting process to secure a loan from a bank may just be too long. Just look at the figures: almost 250,000 projects have launched on Kickstarter with $1.85 billion dollars pledged to projects, of which $1.59 billion worth have been deemed successful. Due to Kickstarter’s nature, their numbers are constantly changing and growing.
“We used Kickstarter as an alternative funding source for our business, LIV – Swiss Watches, an independent boutique style watch brand,” says Esti Chazanow, Co-Founder & Brand Manager. “Kickstarter gave us an amazing framework as a new company: It forced us to articulate to ourselves and our potential backers every last detail about what we planned to do and how we planned to do it including milestones, product development, risks and challenges and so on.”
Chazanow points to several benefits when it comes to crowdfunding. First, they didn’t have to pay interest on the loan, and Kickstarter forced the fledgling enterprise to specify every detail and product development milestone. Crowdfunding also provides built-in marketing in the form of a “fan base” of backers.
On the flip side, it can be very difficult to get noticed without a big marketing budget, and most importantly, an effective video. Experts suggest asking friends and family to contribute immediately and sharing your crowdfunding page publicly once it has some traction from your inner circle.
If your concept does break through the noise, it can be unwieldy to communicate with hundreds or even thousands of backers, keep all of your financial commitments in order and promises met. Before you pursue the crowdfunding route, research other founders who’ve gone this direction and learn from their mistakes.
Another source of financing somewhat similar to crowdfunding is available from Peer to Peer (P2P) lending marketplaces such as Lending Club and Prosper, says Levar Haffoney of Fayohne Advisors LLC.
In this case, the lending platform categorizes potential borrowers by several variables, Haffoney explains. “This determines the interest rate for the borrower. Individuals or businesses will then offer to provide financing at the agreed upon rate. For example, a $100,000 working capital loan may be financed by over 500 individuals.”
Be aware that P2P lending platforms favor borrowers with collateral and good personal credit, generally 680 plus. Platforms that are more flexible charge higher interest rates—about 20 percent—and have shorter terms.
Factors and Purchase Order Finance Companies
“Factoring is a great financing tool, especially for companies in the B2B space,” says Ronnie Sussman, Business Development Officer at Coral Capital Solutions in New York City. A Factor will look at the receivables your company is generating and the credit-worthiness of your business. If you have strong credit, the Factor can provide liquidity to the business by advancing funds to your business the same day it invoices.
This service expedites cash flow to the business so you can make payroll, order inventory, take advantage of supplier discounts, and pay overhead in timely manner.
The “pro” when it comes to factoring is it allows your company to focus on growing sales. It can help prevent a sudden cash crunch from forcing you to miss out on opportunities to take large orders or to pursue larger customers.
However, you need to be aware that the costs of factoring can vary widely. Factors generally want to work with companies engaged in B2B transactions. “Factoring costs more than a bank line of credit,” says Sussman. “Some factors purchase the invoices on a non-recourse basis, thus taking the credit risk on the customer, and some purchase on a recourse basis, which puts the risk on the company instead.”
In addition, a business must have a pile of invoices that are in Net 90+ terms to reap the benefits of this solution.
Fundation combines the benefits of a bank loan with the ease and efficiency of an online lender. We offer conventional loans with competitive rates to businesses with varying credit profiles. Our technology allows us to deliver capital in as few as 3 business days through streamlining the collection and evaluation of customer information and conducting the majority of the lending process electronically. As a direct lender, we use our own capital to originate and hold the loans we make, so that we can focus on building relationships with our customers. Our dedicated customer relationship model enables us to understand each unique borrower’s business. This level of service, coupled with our best-in-class products, is why many of our customers come back to us repeatedly for more capital.