The New Lenders On The Block
Bank lending is flawed, regarding small businesses. It does not work in good times. It does not work in bad times. It does not work when standards are tight (like right now) and it does not work when standards are loose (which through us into financial distress as a nation). There is an old humorous saying, ‘banks will only lend you money when you don’t need it.’ Today, there is a lot of truth in humor – although for many small businesses needing financing to stay alive, this is no laughing matter. But, as it usually happens in this nation, when something is not working, others, those with high entrepreneurial proficiency, seem to step up and fill these voids. This is starting to happen in the banking industry. Decades ago, it was realized that traditional bank lending was not doing all it could for businesses – not just small or new businesses but for any growing business in nearly ever industry. To fill this lending gap, alternative sources of capital began to emerge in to what are today main stream financial vehicles to include asset based lending programs like accounts receivable factoring, business cash advances, purchase order financing and even equipment based loans and leases. As time advanced, other alternatives began to materialize; alternatives like Micro Credit Loan models, Peer-to-Peer social lending sites and even private equity debt facilities that may not require repayment as the loan may convert into equity to capitalize on the upside of the business. Even today, this industry continues to evolve for the better (at least from the small business owner’s prospective). New, entrepreneurial lenders are developing innovative ways to fund the small businesses that current lenders or even their alternative counterparts tend to avoid and they are doing it in ways that reduce unnecessary risk to the lender as well as the stress on the borrower. One example is that there are now new, non-banks lenders that care less about a business’s past financial statements, their level of profitability at time of application or even the amount of collateral they may have and its value. These new lenders instead focus on the business’s ability to generate actual cash inflow and its ability to keep some of that cash on hand, even for short periods. Further, to reduce the risk to these lenders of having a borrower not be able to cobble together a large monthly payment each month, these new creditors take micro payments on a daily basis to reduce the loan’s balance. The benefit to the lender is that it can quickly and easily make adjustments (as quickly as daily) should the business begin to fall behind; which is much better that waiting 30 or more days to find out that one or more loan payments will be missed and much harder for borrowers who get behind to make up. The benefits to the business owner are numerous. One, the company is able to access capital that it might not otherwise have obtained from traditional loan sources, especially if they do not have financial assets that can be used as collateral. Two, these companies have micro payment extracted daily from their accounts; usually amounts so small as not to place any type of cash flow burden on the business’s operations. Three, with daily payments, balances tend to be reduced much quicker than similar loans amortized on a monthly or greater schedule. And, lastly, these companies do not have to struggle to, at their due dates, cover another large monthly obligation that can quickly surprise a growing business. Plus, knowing what is coming out of their account each day can really benefit a small firm. Look at it this way, if a borrower were to receive a $100,000 loans from a traditional lender and make monthly payments for the next 18 months, those payments would be upwards of $6,000 per month. But, under these new systems, business owners can still receive that level of capital but only be saddled with a $100 per day micro payment; making it much easier to manage for. It never fails in this country. As large industry participants are floundering around trying to make up for past mistakes, younger, more agile upstarts swoop in to fill needed voids. Further, as these new business models take hold and prosper, they tend to drive out all the old players. And, if history serves, this is exactly what is happening in the banking industry. While these new loan facilities many not look like the traditional loans products we have all come to know (and in some case loath), they still provide businesses the same life giving nectar that all small firms need to survive and grow – outside capital. So, while your long term goal may to become creditworthy in the eyes of your bank, in the mean time, look at some of these new, emerging entrepreneurial lenders. You never know, you just might like what they have to offer. At the very least, their innovative product might just be the single key that gets your business to the point that traditional lenders will start talking to your again – the point that you really no longer need their help. About Author Joseph Lizio holds a MBA in Finance and Entrepreneurship and has a strong commercial lending background. In his current venture, Mr. Lizio is the founder of - Business Money Today - , a site designed to help business owners find and obtain capital to grow their businesses. Disclaimer: Article submitters are solely responsible for the content of their articles. ArtiLib can't be held liable for the contents of the articles. Report Abuse |
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