Small businesses use their line of credit for cash flow to run daily operations and pay vendors, suppliers, and business partners. Unfortunately, a business line of credit is hard to come by. Even if a company already has one.

Banks make it harder for small businesses

As a result of the financial crisis in 2008, many banks have been rejecting lines of credit renewals to small businesses. The renewal process consists of a tougher application that requires a lot of documentation. In the end, most small businesses don’t pass.

What’s more is that bank loans to small businesses has shrunk drastically.

“Together, 10 of the largest banks issuing small loans to business lent $44.7 billion in 2014, down 38 percent from a peak of $72.5 billion in 2006, according to an analysis of the banks’ federal regulatory filings,” writes Ruth Simon in “Big Banks Cut Back on Loans to Small Business” in the Wall Street Journal.

Saving for a rainy day

Small businesses are holding tight onto the purse strings or looking for other ways to get the needed working capital. According to the Association for Financial Professionals, companies hoarding cash and spending only when it’s necessary have little confidence in the economy.

“The January 2016 AFP CCI illustrates just how careful treasury and finance professionals are with their organizations’ cash,” said Jim Kaitz, president and chief executive officer of Association for Financial Professionals. “But treasury and finance professionals would be wise to look for select opportunities to deploy the cash, rather than reflexively hoard it.”

It’s a catch-22. How can companies grow if they don’t invest it in the business? And how can the economy move forward without companies spending? Nonetheless, they’re reluctant to spend until the economy picks up.

Four alternatives for working capital

Small businesses have a few options for capital to help them get ahead without eating up their needed cash reserves.

Here are the key considerations in finding the best source for working capital:

• Are you B2B or B2C?
• Does your business provide a product or service?
• How much does your business bring in?
• How will you use the money?

More and more small businesses wanting to grow and achieve their business goals are turning to high-priced online lenders. These startups promise a simple and transparent process in which a business could be approved and get cash within a day.

Ruth Simon reports that non-bank lenders’ market share has gone up to 26 percent. And one such lender charges rates averaging 39 percent. Very high when you compare it to a bank’s 5 percent. You can try to get what you need by using credit cards. However, rates average 13 percent, higher than small business bank loans. Still, much lower than online lenders’ rates.

The best financing option depends on your business and needs. Here are four options, but the first one is not recommended.

1. Online lenders

Online lenders should be a last resort as their high rates can lead to more problems. Many provide merchant cash advance, or MCA, which is the payday loans of businesses. What’s scary is that online lenders offering MCA give it different names. In fact, one online lender compares their financing to MCA. This article on merchant cash advance explains how their financing structure can turn companies into addicts.

2. Local and community banks

Local and community banks aren’t constrained by the same rules and regulations as big banks. They also tend to provide more support to small businesses. Although they have a higher approval rate on small business loans, there are fewer community banks since the financial crisis of 2008. Newer regulations like the Dodd-Frank Act have hurt them.

If you find a community bank, search the bank on FDIC.gov to see if they have a consent order. Banks with a consent order have problems to fix, which puts them under scrutiny. Also, look up the bank’s Texas ratio to make sure the score is below 150 percent. Anything higher indicates the bank has credit trouble.

3. SBA loans

For some companies, the U.S. Small Business Administration’s guaranteed loan program may be ideal. What the SBA does is set the guidelines for loans from its partners. They’re more willing to provide loans through this program because it removes the risk for lenders as the SBA guarantees these loans will be repaid.

4. Factoring

If you have unpaid invoices that take too long to get paid, you might want to research invoice financing, or factoring. This flexible financing helps your business take advantage of opportunities that lead to growth and getting ahead of your competitors.

Factoring also improves your cash flow and credit rating. You can use it to get discounts when buying in bulk. Unlike banks, factors look at your clients’ — not your company’s — financial strength and credit rating.

To learn more about this flexible financing, take a look at 10 reasons why you want accounts receivable financing. Here’s one small business accounts receivable financing story.

Just like you have choices in smartphones, you have choices in factoring companies. Some have better options than others. Do your research and refer to these questions to ask about small business loans to help you along the way.

Image credit: Andrew Tseng

Struggling to get enough working capital to support your business strategy? Cash flow low? Learn about an option to get cash without a loan that you have to pay back. Contact us at (800) 499-6179 or fill this form for a no obligation conversation.