Many small businesses avoid seeking loans, but not for the reasons you think. According to a Sageworks survey, business owners opt not to pursue small business loans because they don’t want to take on debt (62 percent) or think they won’t get approved (24 percent).
Data from the Federal Deposit Insurance Corporation (FDIC) shows that small business lending — for loans less than $1 million — has dropped between 2008 and 2012. It has yet to see improvement since.
In February 2015, Biz2Credit Small Business Lending Index posted the following lending approval rates:
- Big banks: 21 percent.
- Small banks: 50 percent.
- Credit unions: 43 percent.
- Institutional investors: 61 percent.
- Alternative lenders: 61 percent.
Another survey from the four regional Federal Reserve Banks has found that half of businesses with revenue up to $1 million couldn’t get loans to grow business.
Barriers to lending to small businesses
Alternative lenders include merchant cash advance providers, factors and other non-bank institutions. One barrier for larger banks and some community banks in granting loans to small businesses is the strict regulations. Low credit scores and lack of collateral put some small businesses at a disadvantage.
The smallest economical changes tend to affect small businesses. This increases their chances of failing and having fewer assets to offer up as collateral. Unlike with big companies, lenders struggle to find public information about small companies to determine their credit worthiness.
Here are six options for finding working capital that may not require collateral.
1. Your business
Sometimes the answer lies within the company and you may not a loan — at least, not now. Instead, increase cash flow without new clients by reviewing expenses, contracts and the invoicing process. With no fees or interest, using the company’s own funds is the best solution.
2. Small Business Administration loans
The U.S. Small Business Administration (SBA) loan programs aim to help small businesses start and grow business. Loans don’t come from SBA. The SBA works with businesses to get loans from third party lenders and act as a guarantor of loans. To make the process easier, SBA facilitates loans, helps find venture capital or guarantees a bond. It also offers financial assistance programs, such as debt financing, surety bonds and qualified private investment funds.
3. Merchant cash advance (MCA) provider
Merchant cash advance providers fund businesses in exchange for future sales at interest rates that are 50 to 100 percent higher than a bank’s. Typically, they take a set amount every day or out of every credit or debit card sale.
For businesses that don’t have credit and debit card sales, MCA providers withdraw the money from a PayPal or bank account. Providers may refer to their financing as business cash advance or small business loan.
4. Private lender
Private lenders provide loans like banks do except they have different policies, rates and plans. They may also ask for collateral. Private lenders can also be loans from friends and family who want to see your business succeed. They tend to offer better interest rates. The downside is that it could affect the relationship.
5. Community and small banks
You’re more likely to get more flexibility from small, regional and community banks. They typically provide more personal service than big banks do. Before you contact a bank, visit FDIC.gov to do a check on the bank for a consent order. A consent order means the bank is under close scrutiny because it has problems to fix.
Another item to look up is the bank’s Texas ratio. The ratio is based on a formula to determine a bank’s riskiness. The higher the ratio, the more severe its credit troubles. A score of more than 100 percent would be cause for alarm. Those with a ratio of 50 and up are considered vulnerable.
You may have heard of factoring, accounts receivables financing or invoice financing. All three of these offer the same type of flexible financing. Factoring refers to the factor, the third party you sell your invoices to at a discounted rate plus fees and interest. What you are doing is trading one asset (money owed you) for another (cash today).
Businesses using accounts receivables financing use it to get cash now instead of having it owed to you. Let’s say a company creates an invoice for $5,000 and sends it to their client with a copy to the factor. Rather than waiting 30, 60 or more days for the client to pay the invoice, the factor sends most of it to the company the same day the invoice came in.
Even though the company doesn’t get $5,000, they get the cash faster. The company can stop worrying about their customer’s late payments and use the cash right away to grow the business or be able to pay its expenses without running out of cash.
If your small business gets cash today, how would you invest it? What other ways can you seek funding?
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Ready to do business development, but low on operating cash flow? Learn about how you can use accounts receivable financing to get cash without a loan that you have to pay back. Contact us at (800) 499-6179 or fill this short form for a no obligation conversation.