Alternative financing options are on the rise and more small businesses are seeking them, according to results from the Q2 Private Capital Access Index from Dun & Bradstreet and Pepperdine Graziadio Business School.
Here are some of the findings:
Thirty-four percent (34%) of respondents attempted to raise bank financing in the last quarter, up from 29% reported in Q1.
Attempts to secure a loan from a traditional bank has declined since Q1, however, with 41% of businesses reporting that they sought a bank loan as a source of funding compared to 49% the previous quarter.
Bank loan success rates are also down for both small and mid-sized businesses, with 32% of small businesses (down from 41% the previous quarter) reporting success rates for bank loans.
The number of businesses that sought alternative funding options this quarter surged in the Q2 study. The leading sources sought are:
Business credit cards: 53% in Q2 (up from 42% in Q1)
Crowdfunding: 20% in Q2 (up from 14% in Q1)
Online lenders: 29% in Q2 (up from 20% in Q1)
Factoring: 16% in Q2 (up from 11% in Q1)
Merchant cash advance: 15% in Q2 (up from 12% in Q1)
The study said the rise in demand for non-bank funding could indicate a general increase in the sophistication of alternative lending options, an increase in the number of start-up businesses (who lack the credit history to apply for a traditional loan), or simply that business owners are frustrated with the red tape that prevents them from acquiring the capital they need. While the PCA Index doesn’t suggest a definitive cause for the surge in alternative lending, it does suggest that business owners have options when it comes to obtaining capital and improving their companies’ cash flow.
“Cheaper, faster alternative sources of credit may be appealing to small and medium sized businesses,” said Dr. Craig R. Everett, director of the Pepperdine Private Capital Markets Project. “However, small businesses need to do their due diligence such as looking at lender backgrounds, past history with other borrowers and fees and penalties. The devil is in the details.”
If your business is young, has little collateral, or doesn’t have an established credit profile, qualifying for traditional bank financing can be a challenge.
Alternative business financing is capital that you can borrow from non-traditional sources. This type of financing typically offers more flexibility in terms of the qualification criteria your company will need to satisfy, such as for credit and collateral requirements as well as time in business. Even PayPal is considered a digital lending alternative; the company recently announced that they had crossed $10 billion in small business lending in only 5 years.
To be sure, alternative lending options generally charge higher interest rates and fees than traditional bank loans. Alternative loans may require you to pay them back at a much faster rate as well. But on the flip side, if you manage your alternative loan or line of credit well, it might even help you to build business credit in order to better quality for tradition loans.
Florida SBDC at FIU Consultant Raju Mohandas, who specializes in access to capital, says that companies who tell him they have tried everything are likely knocking on the same doors – banks and/or investors. “There are options in the alternative financing world,” he said in an earlier interview.
Those include equipment loans, leasing companies, finance companies that will fund you based on credit cards, Accounts Receivables financing, PIO financing, project financing and companies that specialize in factoring.
“You are going to pay more for it, that’s obvious, but what happens is you have extra options,” he says. “It’s up to you to analyze whether the cost and added risk is worth it.”
Community financing programs may be an option for your business.
SBDC at FIU consultant Julio Villiers recommends small businesses look into Miami Bayside Foundation, Accion and NLP (Neighborhood Lending Partnership) – these are community organizations providing funding if your company meets various criteria. Miami Bayside Foundation, for instance, has awarded more than $3.1 million to 71 minority owned businesses within the City of Miami, but a lot of companies don’t know about this resource.
If you are seeking funding for one of two specialized needs – real estate for your business to occupy or equipment – don’t overlook specialized loan products such as the SBA 504 loan. 504 loans require a smaller amount down — typically 10% rather than 20% — and are easier and faster to get than they used to be. Many people are not aware that the 504 can be used for qualifying equipment for your business.
Small businesses can look hard into their own circles too.
“At the end of the day if the client isn’t bankable at the moment, there are options. They may have equity in their home, some may have friends and family, or savings they can tap, such as an old 401k,” says Villiers.
SBDC consultants can help small businesses determine whether traditional bank loans, specialized loans like the SBA 504, alternative financing routes, community financing organizations or just good old fashioned bootstrapping is right for them. Alternative financing, community programs and microloans can also bridge the gap while you work on the issues preventing your business from getting a traditional bank loan or line of credit, and SBDC at FIU, the small business development center within FIU’s College of Business, is a resource to help with that.