Alternative financing lets small businesses move forward
Dec 11, 2012 Sean Albert
The housing market has picked up and many people see signs of economic recovery, but small businesses still struggle to find the financing they need to move forward with expansion plans or simply stay afloat. With little collateral to offer, many entrepreneurs have difficulty convincing traditional banks to fund a new enterprise that's long on ideas, but short on cash. However, the rise of alternative lending, from cash advances to short-term loans, is making the financial landscape easier for small businesses to navigate. FoxBusiness reports that an alternative lending avenue that has gained momentum is money provided by factoring companies, otherwise known as accounts receivable financers. They buy a company's accounts receivable at a lower rate than the full value, providing the business owner with needed capital. Debt collection proceeds on the accounts receivable by the factoring company. "Interest rates generally are higher with factoring, [but] the lender is assuming a higher level of risk, which justifies the return," writes Rohit Arora, CEO of Biz2Credit, for the Fox website. "Many times, small business owners who have little or no credit history or who need a lot of money quickly turn to AR financers." Alternative funding spreads
Arora, whose company links businesses to both traditional and alternative credit sources, notes that non-traditional financing from factoring firms and cash advance programs is often available more quickly and with less red tape than traditional bank loans. As these options spread throughout the financial industry, interest rates for small to medium-sized businesses are becoming more competitive. American Express Merchant Financing, for instance, has offered rates as low as 6.5 percent with approval available within a few days. The type of business that has spurred growth by offering alternative funding might follow the model of companies like Kabbage, according to USA Today. The online firm offers cash advances to small businesses with nearly instant approval time. Kabbage is known for approving loans in a few minutes based on techniques that are common to alternative financing companies. Rather than focusing on collateral and credit ratings, the newspaper reports that these lenders look at a small business' online sales, banking transactions and social media feedback as part of a technology-driven approval strategy. The online company charges interest rates of two to 18 percent on short-term loans from 30 days to six months, Kabbage CEO Robert Frohwein told USA Today. But business owners must find the terms agreeable - Frohwein said Kabbage's loan default rate is below two percent.
Arora, whose company links businesses to both traditional and alternative credit sources, notes that non-traditional financing from factoring firms and cash advance programs is often available more quickly and with less red tape than traditional bank loans. As these options spread throughout the financial industry, interest rates for small to medium-sized businesses are becoming more competitive. American Express Merchant Financing, for instance, has offered rates as low as 6.5 percent with approval available within a few days. The type of business that has spurred growth by offering alternative funding might follow the model of companies like Kabbage, according to USA Today. The online firm offers cash advances to small businesses with nearly instant approval time. Kabbage is known for approving loans in a few minutes based on techniques that are common to alternative financing companies. Rather than focusing on collateral and credit ratings, the newspaper reports that these lenders look at a small business' online sales, banking transactions and social media feedback as part of a technology-driven approval strategy. The online company charges interest rates of two to 18 percent on short-term loans from 30 days to six months, Kabbage CEO Robert Frohwein told USA Today. But business owners must find the terms agreeable - Frohwein said Kabbage's loan default rate is below two percent.
