“Small businesses were hit harder than larger businesses during the 2008 financial crisis, and have been slower to recover from a recession of unusual depth and duration.” according to a research paper by Harvard Business School. The primary reason for that is that US high street banks have cut back on their SME lending activities to reduce balance sheets to comply with new capital adequacy regulations. This has had a substantial impact on small and medium-sized businesses in the US as funding and sufficient cash flows are two key aspects for many small businesses’ survival and the majority of small businesses have traditionally relied on bank capital for funding. Many businesses, therefore, have had to use expensive credit cards to help with cash flow management.
Fortunately for small and medium-sized businesses in the US, there are now several new trustworthy alternative financing providers that SMEs can use to secure much-needed funding. New alternative financing options include online small business loans, peer-to-peer loans, invoice financing and cash merchant advances. Before the 2008 financial crisis, none of the above-mentioned alternative funding options were readily available for small businesses. But now, more and more businesses are going down the route of using alternative lenders, as they are not receiving the service they need from their banking partners.
Online Non-Bank Lenders
Online lending platforms are offering loans to SMEs with a higher acceptance rate than banks without necessarily charges higher interest rates. Online lenders provide loans to start-ups and SMEs with a loan approval time of 24hrs or less. It’s counterparts from the banking sector usually take two to four weeks to approve loans, which is another reason why SMEs are increasingly seeking funding from non-bank lenders instead.
Peer-to-peer lenders, such as the New York Stock Exchange-listed LendingClub, offer another option for debt funding for start-ups and SMEs. Peer-to-peer lending refers to the borrowing from a range of private individuals through an online peer-to-peer lending platform. Companies can apply for peer-to-peer loans online and once their applications have been approved and the terms of the loans are agreed, the loans are listed on the online platform for individuals to invest in. Once the loan is fully funded it is dispersed to the company and repayment takes place in the form of amortizing monthly payments. Interest rates on peer-to-peer loans vary with creditworthiness, but can at times be lower than bank capital.
Invoice financing refers to a company selling its invoices at a discount in return for immediate cash to meet cash flow needs. This form of financing has previously only been available for large corporations but has now become available online through providers such as BlueVine. Invoice financing is an excellent way to fund a business that faces long payment cycles. A small fee is charged for this service, but one that is small compared to high interest bearing bank loans or small business credit cards.
Cash Merchant Advances
Alternatively, small businesses can also opt for cash merchant advances during times of funding needs. This is a popular means of financing for small businesses with very little credit history or with bad credit. Merchant cash advances are cash advances that are paid off with a percentage of daily sales revenues. Merchant cash advances use what is called a factor rate. The factor rate can range from 1.15 to 1.5 or more, which means the business will need to pay back 115% to 150% of the cash advance out of its sales. Cash merchant advances can be very costly so they should only be used for businesses that are confident they can make the required repayments.