Small Businesses Look to Unconventional Sources for Funding
Feb 22nd, 2012 @ 10:11 PM by Amber Nelson
Since the financial crisis several years ago, small businesses have had a tough time securing funding for their operations as banks have upped their lending standards and pulled back from investment.
While there are some signs that major banks are starting to open up their lending spigots slightly for small businesses, the credit and collateral requirements remain difficult for many owners to meet.
Where many U.S. small firms used to be concentrated in the manufacturing industry with plenty of land and equipment to put up as collateral, the small business arena has now largely shifted to the service industry without those old loan staples.
“A lot of the traditional collateral that entrepreneurs used to have disappeared,” said Ami Kassar, a financing consultant and CEO of MultiFunding, as quoted in a CNN Money article.
And without funding from the banks and credit unions, many small business owners have turned to riskier financing options.
“Banks have backed away from making loans at a time when what many businesses have of value is cash flow and not physical assets,” said FOCUS invesment banker John Slater in that same article. “That’s created a market opportunity for the cash advance industry.”
Cash advance companies that cater to small firms usually allow borrowers to take out loans of up to $200,000, and have between six months to a year to repay the money. The fees are steep, however, with annualized interest rates ranging from 104 percent to 177 percent.
Instead of requiring collateral, these cash advance companies, like AmeriMerchant and Rapid Advance, require customers to give up about 15 percent of every sale until the debt is repaid in full.
While the fees and rates could certainly be considered highway robbery, many small businesses are thankful for the availability of cash these companies offer.
American Express is one of the few large companies to offer a similar product to customers, recognizing the niche for quick financing.
“I have to give American Express props for entering this business,” says Zalmi Duchman, CEO of TheFreshDiet.com, who has taken advantage of such loans to fund his business. “They’re doing what the banks and SBA aren’t doing, and that’s giving out money. It’s hard to demonize them.”
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.