How to Get a Loan? Let Us Count the Ways
During the recession the refrain that banks weren't lending to small businesses was heard so often, it should have its own meme.
Fortunately, entrepreneurs are an endlessly resourceful lot, and many discovered an entire world of lending alternatives to help keep them afloat. Once you start looking too, you'll realize alternative lenders have different standards than bank lenders do, and aren't necessarily looking for three years of perfect balance sheets. Many will focus on the potential your business has to grow, and will lend based on your future revenues or other the value of your other assets.
So if you want to tap all your latent anti-bank rage and look elsewhere for your financing needs, there are plenty of places to go--more than ever. And you're likely to find that rates have come down since the financial crisis began, particularly as demand has increased. That's not to say you should jump into alternative lending blindly: Rates can still be high and terms can be dubious.
Here's a look at some of the options.
Factoring has a notoriously bad rap from the old days when factoring shops operated like sleazy used-car dealerships, where you'd risk sinking your business with usurious rates. But a lot has changed, and many reputable factors can lend you money at reasonable rates.
Factors lend you money by financing the value of your receivables, usually up to about 80 percent of their value. For that, they take on the task of bookkeeping and collecting plus any risk, such as the danger of a customer filing for bankruptcy.
In return, you get a loan that functions somewhat like a credit line. You'll be charged a commission for the credit, plus interest. Commission is likely to be about one percent of the total, and interest is likely to be prime plus about three percent. As a benchmark, rates on the Small Business Administration's guaranteed 7(a) loans range between prime plus 2.25 percent and prime plus 2.75 percent. Rates on non-guaranteed commercial loans will be even higher.
"Small businesses will come to a factoring institution because factors [unlike banks] are more focused on the collateral not the actual balance sheet," says Mike Stanley managing director Rosenthal & Rosenthal, of New York, which factors for 500 businesses, many in the small and mid-market.
Jonathan Levine, president of Lancer & Loader Group, is an importer and distributor of electronic consumer products with 12 employees, based in New York. The company started distributing its LEDs to established retailers like Bed, Bath & Beyond, Costco, Sears and Walmart in 2006. At the time no banks would lend, because the company couldn't provide several years of earnings, even though it had an impressive client roster.
Levine says he secured a $1 million credit line secured against receivables from Rosenthal & Rosenthal for rates comparable to a bank loan.
"Factoring is a good alternative for new companies who really need to focus their internal resources, both financial as well as human capital resources, towards growing the business," Levine says.
CIT, Rosenthal & Rosenthal, and Wells Fargo are three of the largest factors. You can also check out Factors Chain International, a network of 265 factors internationally, for more information.
Asset-Based Lending is similar to factoring, but instead of lending against outstanding invoices, lenders extend credit against the value of your assets. In some ways asset-based lending is similar to a bank loan, because unlike factoring, the lender does not take an active role in business collections.
An asset-based lender will go down the asset side of the balance sheet, assessing the value of items like inventory, equipment, machinery, real estate, and even intangible items like the worth of your name brand. It will then lend a percentage of the total value, usually up to 80 percent or more.
The asset-based lender takes a senior secured position in the loan, using the assets as collateral. Like traditional bank loans, asset-based loans have a closing fee between 0.5 percent and 1 percent of the total. All told, asset-based loans can be one to three percentage points higher than a bank loan, experts say.
Robison Oil, of Elmsford, New York, found itself shut out of its bank's asset lending services when the bank pared back its energy division after a merger about 10 years ago, says Dan Singer, a co-president of Robison. One of the things the bank was looking for was a strong balance sheet year after year. But since Robison is seasonal, it often showed a loss at the end of the year, which didn't fit its new bank's criteria.
It turned to Rosenthal & Rosenthal, which found its $30 million dollar customer list appealing and was willing to extend an $11 million term loan and $18 million credit line.
"We thought about going back to a bank, but we have found this segment of lenders much more flexible," Singer says, adding that total financing costs were about one percentage point more than the company would have gotten with a traditional bank loan.
Other asset-based lenders include Triton Financial Solutions and Simplified Leasing. Check out the Commercial Finance Association for more information on asset-based lending.
Nonbank Loans and Advances:
A host of companies provide financing against future income. These companies have proliferated online since the banking crisis, but the loans tend be for smaller amounts. These are basically merchant advances secured against cash in the bank or potential credit card sales. One such lender, Kabbage, of Atlanta, does its underwriting over the Web, looking at non-traditional criteria like Paypal information and number of sales on Etsy, as well as whether you communicate with customer on Facebook and Twitter. In that way it compiles a credit score using alternate sources, unlike the credit score and credit bureau check that banks do, while considering the potential of your future business.
"Having more cash available is especially important in the online world when you have so many opportunities flowing by in river and you have to scoop it up or it is gone," says Marc Gorlin, chairman and one of three co-founders of Kabbage. He says Kabbage's loans range between $500 and $50,000.
Quick access to capital was important for Adam and Kit Chase, the owners of Trafalgarsquare.com, an online store for children's cards and wallpaper. The company was founded in 2008, and no bank would look seriously at it for financing, even though sales have been strong. In 2012, the Chases wanted to take advantage of a trend it had noticed in wall stickers and decals, for which they needed to buy special printing equipment.
"Banks had high interest rates, or they did not want to lend, or they were not flexible, they either wanted to give us an amount that was too large or too small," Kit Chase says.
Kabbage approved the Chases for a $2,000 loan, and the same day funds were in the couple's Paypal account.
"We have done a couple of things with flash sale sites, and often we won't have the money for materials, and with Kabbage we can get the money before events and produce products and pay it back," Kit Chase says.
Kabbage doesn't charge interest, rather it charges a flat fee for the financing, between 2 percent and 7 percent for 30 days, and 10 percent to 18 percent for six months.
Other similar providers include Lighter Capital and On Deck Capital.
Amazon and Paypal have also started offering financing services to some of their best online merchants recently. With Amazon, this is by invitation only, and financing is structured as a loan at 13% monthly interest. But loan recipients must use the financing within the Amazon marketplace. Paypal has made merchant advances available to merchants in the United Kingdom for a flat fee of 27% of the loan.
A good resource either to find a merchant advance lender or ot find one is the North American Merchant Advance Association.
Loan Brokers that specialize in small business loans can do the legwork of tracking down lending companies for you if you don't feel like doing this yourself. They can recommend a wide range of products and services, including things like merchant cash advances, accounts receivable and inventory financing, lease buybacks and purchase order financing, as well as more conventional loans like those offered by the SBA or even the U.S. Department of Agriculture.
Such is the case for MultiFunding, of Broad Axe, Pennsylvania, which checks these alternatives, and others, for its clients.
"It is difficult for most small business owners today to know where they fit into the funding trajectory, there are so many moving parts," says Ami Kassar, chief executive of MultiFunding.
Generally speaking, small business owners consult with brokers at no cost, then pay a fee only if they successfully get a financing. In MultiFunding's case, that fee is between 1 percent and 2.5 percent of the total loan amount.
Other loan brokers include Biz2Credit, and a free service from Intuit called Loan Finder.