It Might Be Time to Break Up With Your Bank

A terrific article from INC magazine about alternative funding mechanisms.  My only dissappointment is that it doesn’t go far enough, and take in crowdfunding.  Sites like indiegogo have had huge success as well.  –  Reeve

Banks still aren’t lending much, but there’s a universe of alternative financing to discover

During the recession the refrain that banks weren’t lending to small businesses was heard so often, it should have its own meme.
Fortunately, entrepreneurs are an endlessly resourceful lot, and many
discovered an entire world of lending alternatives to help keep them
afloat. Once you start looking too, you’ll realize alternative lenders
have different standards than bank lenders do, and aren’t necessarily
looking for three years of perfect balance sheets. Many will focus on
the potential your business has to grow, and will lend based on your
future revenues or other the value of your other assets.
So if you want to tap all your latent anti-bank rage and look
elsewhere for your financing needs, there are plenty of places to
go–more than ever. And you’re likely to find that rates have come down
since the financial crisis began, particularly as demand has
increased. That’s not to say you should jump into alternative lending
blindly: Rates can still be high and terms can be dubious.
Here’s a look at some of the options.
Factoring has a notoriously bad rap from the old days when
factoring shops operated like sleazy used-car dealerships, where you’d
risk sinking your business with usurious rates. But a lot has changed,
and many reputable factors can lend you money at reasonable rates.
Factors lend you money by financing the value of your receivables,
usually up to about 80 percent of their value. For that, they take on
the task of bookkeeping and collecting plus any risk, such as the danger
of a customer filing for bankruptcy.
In return, you get a loan that functions somewhat like a credit line.
You’ll be charged a commission for the credit, plus interest.
Commission is likely to be about one percent of the total, and interest
is likely to be prime plus about three percent. As a benchmark, rates on
the Small Business Administration’s guaranteed 7(a) loans range between
prime plus 2.25 percent and prime plus 2.75 percent. Rates on
non-guaranteed commercial loans will be even higher.
“Small businesses will come to a factoring institution because
factors [unlike banks] are more focused on the collateral not the actual
balance sheet,” says Mike Stanley managing director Rosenthal &
Rosenthal, of New York, which factors for 500 businesses, many in the
small and mid-market.
Jonathan Levine, president of Lancer & Loader Group, is an
importer and distributor of electronic consumer products with 12
employees, based in New York. The company started distributing its LEDs
to established retailers like Bed, Bath & Beyond, Costco, Sears and
Walmart in 2006. At the time no banks would lend, because the company
couldn’t provide several years of earnings, even though it had an
impressive client roster.

Levine says he secured a $1 million credit line secured against
receivables from Rosenthal & Rosenthal for rates comparable to a
bank loan.
“Factoring is a good alternative for new companies who really need to
focus their internal resources, both financial as well as human capital
resources, towards growing the business,” Levine says.
CIT, Rosenthal & Rosenthal, and Wells Fargo are three of the largest factors. You can also check out Factors Chain International, a network of 265 factors internationally, for more information.
Asset-Based Lending is similar to factoring, but instead of
lending against outstanding invoices, lenders extend credit against the
value of your assets. In some ways asset-based lending is similar to a
bank loan, because unlike factoring, the lender does not take an active
role in business collections.

An asset-based lender will go down the asset side of the balance
sheet, assessing the value of items like inventory, equipment,
machinery, real estate, and even intangible items like the worth of your
name brand. It will then lend a percentage of the total value, usually
up to 80 percent or more.

The asset-based lender takes a senior secured position in the loan,
using the assets as collateral. Like traditional bank loans, asset-based
loans have a closing fee between 0.5 percent and 1 percent of the
total. All told, asset-based loans can be one to three percentage points
higher than a bank loan, experts say.

Robison Oil, of Elmsford, New York, found itself shut out of its
bank’s asset lending services when the bank pared back its energy
division after a merger about 10 years ago, says Dan Singer, a
co-president of Robison. One of the things the bank was looking for was a
strong balance sheet year after year. But since Robison is seasonal, it
often showed a loss at the end of the year, which didn’t fit its new
bank’s criteria.

It turned to Rosenthal & Rosenthal, which found its $30 million
dollar customer list appealing and was willing to extend an $11 million
term loan and $18 million credit line.

“We thought about going back to a bank, but we have found this
segment of lenders much more flexible,” Singer says, adding that total
financing costs were about one percentage point more than the company
would have gotten with a traditional bank loan.

Other asset-based lenders include Triton Financial Solutions and Simplified Leasing. Check out the Commercial Finance Association for more information on asset-based lending.

Nonbank Loans and Advances:

A host of companies provide financing against future income. These
companies have proliferated online since the banking crisis, but the
loans tend be for smaller amounts. These are basically merchant advances
secured against cash in the bank or potential credit card sales. One
such lender, Kabbage, of Atlanta, does its underwriting over the Web,
looking at non-traditional criteria like Paypal information and number
of sales on Etsy, as well as whether you communicate with customer on
Facebook and Twitter. In that way it compiles a credit score using
alternate sources, unlike the credit score and credit bureau check that
banks do, while considering the potential of your future business.

“Having more cash available is especially important in the online
world when you have so many opportunities flowing by in river and you
have to scoop it up or it is gone,” says Marc Gorlin, chairman and one
of three co-founders of Kabbage. He says Kabbage’s loans range between
$500 and $50,000.

Quick access to capital was important for Adam and Kit Chase, the
owners of, an online store for children’s cards and
wallpaper. The company was founded in 2008, and no bank would look
seriously at it for financing, even though sales have been strong. In
2012, the Chases wanted to take advantage of a trend it had noticed in
wall stickers and decals, for which they needed to buy special printing

“Banks had high interest rates, or they did not want to lend, or they
were not flexible, they either wanted to give us an amount that was too
large or too small,” Kit Chase says.

Kabbage approved the Chases for a $2,000 loan, and the same day funds were in the couple’s Paypal account.

“We have done a couple of things with flash sale sites, and often we
won’t have the money for materials, and with Kabbage we can get the
money before events and produce products and pay it back,” Kit Chase

Kabbage doesn’t charge interest, rather it charges a flat fee for the
financing, between 2 percent and 7 percent for 30 days, and 10 percent
to 18 percent for six months.

Other similar providers include Lighter Capital and On Deck Capital.

Amazon and Paypal have also started offering financing services to
some of their best online merchants recently. With Amazon, this is by
invitation only, and financing is structured as a loan at 13% monthly
interest. But loan recipients must use the financing within the Amazon
marketplace. Paypal has made merchant advances available to merchants in
the United Kingdom for a flat fee of 27% of the loan.

A good resource either to find a merchant advance lender or ot find one is the North American Merchant Advance Association.

Loan Brokers that specialize in small business loans can do
the legwork of tracking down lending companies for you if you don’t feel
like doing this yourself. They can recommend a wide range of products
and services, including things like merchant cash advances, accounts
receivable and inventory financing, lease buybacks and purchase order
financing, as well as more conventional loans like those offered by the
SBA or even the U.S. Department of Agriculture.

Such is the case for MultiFunding, of Broad Axe, Pennsylvania, which checks these alternatives, and others, for its clients.

“It is difficult for most small business owners today to know where
they fit into the funding trajectory, there are so many moving parts,”
says Ami Kassar, chief executive of MultiFunding.

Generally speaking, small business owners consult with brokers at no
cost, then pay a fee only if they successfully get a financing. In
MultiFunding’s case, that fee is between 1 percent and 2.5 percent of
the total loan amount.

Other loan brokers include Biz2Credit, and a free service from Intuit called Loan Finder.
Jeremy Quittner
is a staff writer for Inc. magazine and He previously covered
technology for American Banker and entrepreneurship for BusinessWeek. @JeremyQuittner