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The New Lenders On The Block

Guest post by: Joseph Lizio

Article Overview: While traditional credit remains tight for small businesses, other entrepreneurial lenders are stepping in to fill this void. While not set up like most lending products, they still provide businesses with capital they might not have received otherwise.

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.

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Article Tags: banks, business, lenders, lending, loans



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Re: Fed rate cuts . . . - Prime may be down but the Lender's tightened up, so the rate going down really doesn't help the avarage Joe or the fair credit borrower. Seems that pro-franchise Lenders all over the country all raised their standards. Where I used to be able to get someone franchise financing with a credit score of 650 and minimum collateral (30- 40%) with little management experience or no direct industry experience; the Lender's now want credit of 670+ and 50 - 70% in collateral on a minimal level (depending upon the lender and the franchise) and they are all requiring stronger & related experience (industry experience preferred). New franchises to the franchising industry are very hard to get financing for, unless you are a really strong borrower with strong related experience. If you are opening a restaurant franchise, the lenders want to see you have restaurant and management experience. Lenders also want to see a long track record with a franchise and they want to see 75+ units up and running successfully before they put down their guard. These are truely tough lending times and i don't really think the lower rate helps the avarage person.
Re: Suggestion for an Entrepreneur Looking for Funding - Hi Chris, Did you professionally package up the information? Lenders are picky and most will not even bother to look at a loan package if it is not done correctly. The odd thing about it is that they don't typically tell you how to present it, so your left with the research. Did you get financed?
interested but... - Nana- That was an interesting article, however, it's been my experience as a financial advisor who works SBA franchise loans of 100K - 3 million (daily) that when anyone finances a business via personal resources rather than a business loan, they cannot obtain a working capital loan later on. Should they need it to keep going, they may find themself in trouble. It's better to build a track recrod with a lender right from the start (for future use). It's always better to be in business debt rather than personal debt Lenders tend to take on the attitude that you didnt need them before, so why should they help you now! They simply won't take on the risk. I dont recommend anyone financing themself.
Office gifts,help settle this one... - Ok- I wasn't sure where to post this, so I just stuck it in the forum I moderate. I think I've mentioned before that I work a full time job (outside of my home businesses), in a business financial brokerage. that being said, see if you can settle this one- Every year during December Holiday time, we receive gift baskets in the office from the banks/ Lenders we work with. My boss, although very generous all year long, will take most of the gift baskets home for he and his family. I'm talking a heck of a lot of gift baskets! My view on this is that when a gift basket is sent to an office, it should be enjoyed by everyone because we all work as a team equally as hard. We (the staff) believe that although most of the baskets are addressed to our boss, they are meant for "the office" because last year one of the lenders found out that my boss took it home (our office manager blew the whistle there) and the bank got upset and sent another one just for the staff! What is everyone's take on this, does he have the right to take it all home and "hog" the gift? If it happens again this year, should something be mentioned to him and if so, what/how?
Re: An additional Need when requesting Funding - [quote="speechlady":tvlfm6si]In addition to capital, it is important that the individual who is requesting funding, consider any assets that they may have which may allow for a "better type of funding" to help with their projects.[/quote:tvlfm6si] While I agree with the business plan information, I do not agree with the above statement, because although a person may be able to secure a better rate with (say) a home equity loan, they are not building a track record for future use with a business lender and that is not beneficial. (Especially if you are a franchisee as most franchisees open more than one unit) and therefore stand to benefit more from building a relationship with a business loan lender from the get go (but this advise definately holds true for anyone going into business. In addition, should you need working capital now or in the future, you may not have enough home equity to support that too. Lenders do not typically approve working capital loans when you finance the business via personal funds.


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