In the current environment of tight credit, even successful small businesses are finding it difficult, if not impossible, to get a bank loan. CIT’s recent bankruptcy filing only spells more trouble for companies looking for financing—and underscores the need to look for alternative sources of capital. Here are six possibilities to consider:
In 2008, several sites shut down while they waited for permission from the Securities and Exchange Commission to register their loans as securities. Now, most have received approval and opened for business again. As a result, the industry could grow from about $500 million in annual loans to more than $100 billion in 2012, according to Forrester Research, a market research firm in Cambridge, Mass.
Micro-lending. These mostly non-profit organizations provide loans of up to $150,000 to small businesses. Generally, the groups are community development corporations, which are partially sponsored by the Small Business Administration. Probably the best known is ACCION, but there are many others across the U.S.
The good part is their flexibility. Micro-lenders usually look for a good credit score, industry experience and collateral. But, “that can even be a television or a car,” says Jim Olp, senior business consultant at the Denver Metro Small Business Development Center. “They’ve been the major source of all the loans we’ve gotten for our clients this year.”
Factoring. Otherwise known as receivables financing, a factor advances businesses 70% to 90% of the value of their receivables and then assumes responsibility for collecting the money. While CIT has been a big player in this arena, there are others, like Wells Fargo, that also do factoring. (For more about factoring, check out Anita Campbell's story here).
But there are definite plusses and minuses to this approach. For example, factors get a fee and it can be steep, anywhere from 3% to 15% of the invoice. And, if the customer doesn't pay, "The small business eats it," says Olp. On the other hand, you can often get your money in just 24 to 48 hours.
Take Yesenia Loya. Earlier this year, Loya, vice president and co-founder of Loya Construction, a 10-employee, Denver-based construction company, was turned down by four banks for a loan. So, she found a factoring company that paid her $20,0000 for a 3% fee; she got it in about two days. She’s using the money for payroll and operations.
Purchase order/merchant cash advance financing. With this tack, companies advance cash before a sale has happened, generally for a signed purchase order for goods or services. Or they provide cash upfront in exchange for collecting part of a merchant’s future credit-card receivables.
As with factoring, “The financing depends on the customer’s, not the small business owner’s. credit, so your credit rating doesn’t matter,” says Olp. But, also like factoring, cash-advance companies get a steep percentage of the purchase order.
Credit and charge cards. They’re the first source of funding for many small businesses. It’s an easy way to fund operations, of course, as long as you pay off the balance in 30 days. While many companies have been tightening the amount of credit they allow, successful businesses can still negotiate expanded lines, according to Ken Gaebler. A small-business consultant in Chicago, he also runs Walter Sands, a 15-employee marketing company. Recently, Gaebler was able to extend his line of credit to $30,000 from $20,000. “It took about two seconds,” he says.
In addition, Gaebler notes other benefits, as well. For example, most credit card companies give business owners checks that can be used as cash equivalents, so long as they don’t go over their credit limit. “If, for example, you’re short on cash, you can write one of these checks out to your business and make your payroll,” says Gaebler. And some charge cards, like the American Express Plum, will let you defer payment for limited periods of time.
Supplier credit. This involves negotiates payment terms that, in effect, provide you with more money. An approach long used by small businesses, it’s on the increase, according to Joe Abraham, a small-business consultant in Hoffman Estates, Ill., who says he’s seen a significant increase in activity among his clients since about March.
