By Karlene Sinclair-Robinson, special to Overdrive
Entrepreneurs have weathered the storms of personnel issues, market adjustments and one cash flow crisis after another. And yet, many are not able to build a cash reserve to keep them afloat. Some have hit rock bottom, only to rebound again, while others have closed their doors forever. When access to capital through banks has just about dried up, where do they go? Enter alternative financing.
When the bottom fell out of the market, many saw their dreams evaporate. The financial meltdown caused a mental shift; many entrepreneurs are now using or considering alternative financing. With opportunities for business expansion and business survival available in today’s competitive market, alternative lenders are filling the gap and making a difference for growing and struggling entrepreneurs.
How alternative financing works:
- Business Plan Syndrome – A business plan is mandatory when borrowing from traditional lenders. The plan is only required for certain alternative financing solutions. When a business owner accesses capital through the sale of accounts receivable (factoring) or uses their credit card transactions (merchant cash advance) as collateral to gain funding, no business plan is required.
- Industry Niche – It is important that entrepreneurs understand their ability to use their industry suppliers’ credit terms as a potential opportunity for financing.
- Credit worthiness – The credit worthiness of your clients is an important factor. You want to know that the companies you are doing business with will pay you. No matter what type of business you are in and how flawed your financial position may be, having credit-worthy clients is essential.
- Credit Report vs. Credit Score – The credit score tells one story, while the actual credit report refines what that story is. If the credit report proves the individual does not care about credit and other people’s money (OPM), the financing request will be denied. If the report details some negative historical data, such as bankruptcy or medical debt, but not a total disregard for OPM, you could be approved.
- Cash Flow – Banks require liquidity and must see positive cash flow in a loan request. However, in the alternative financing market, cash flow can be the challenge that actually helps you gain the financing needed.
- Collateral Position – Unencumbered assets, or those with strong equity positions, are required in a traditional loan. The collateral required for an alternative source does not necessarily encumber all of the business owner’s assets. This depends on the financing method being used. Solutions like revenue-based lending, crowdfunding or vendor financing do not tie up all collateral.
- Multi-Pronged Approach – Using a multi-pronged financing approach to solving the monetary needs of a business is important. By not having to encumber all of the available assets, a business owner could tap into merchant cash advance, peer-to-peer lending, equipment financing or even a private commercial loan to finance business operations or expansion.
- Looking Back vs. Forward – Alternative lenders consider this: Will the entrepreneur be able to pay me back in the future? Banks must see strong past financials. In reality, if there are no new orders, clients or deals coming in, how will that loan be repaid?
- Defining RISK – The risk to any lender must be taken into consideration. However, alternative lenders define risk based on their financing strategy. They see new contracts as the incentive to provide the funding or the new business for what it is; not just a startup, but one that could make money and create jobs.
Today, many investors are investing in these markets due to better ROIs. It is now considered the cornerstone of the financial market. So, whether you are for or against these alternative financing methods, they are here to stay. They are making a difference.
Karlene Sinclair-Robinson is the author of Spank the Bank: The Guide to Alternative Business Financing. She is considered a foremost expert on alternative business financing for startups, small businesses and struggling entrepreneurs. She is a seasoned mom-preneur, speaker, instructor and business consultant based in Northern Virginia.