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Many are looking for alternatives to bank Experts say finding the correctg alternative to a bank loanis It’s important to find the right alternative and overcomse negative perceptions about non-bank financing. “A lot of borrowerds thought there was a stigmq attachedto [alternative lenders],” said Marilyn chairwoman of the in Washington, D.C. “Ity was kind of like you were sayinfyou weren’t good enough for a bank.
” One populart option is factoring, which is when a business sells its accountd receivable at a discount to a third which collects and keeps the Factoring differs from bank lendinv in that the emphasis is placeed on the value of the receivables and not the credit worthiness. It is also not a loan but simplu the purchase of afinancial asset. Factors make funds availabl e to a business that might not be able to get a bank But experts say factoring can be more expensive thanbank lending, as factors take a fee and pay a discounf for the receivables. Another option is cash flow lending, where a lender determines loan eligibility based on a reviews of bank and creditcard statements.
Landids cited New York’s On Deck Capital as one organizationh that handles this sortof lending. Therew are also boutique banks that make loansa to certain typesof businesses. One in Kansas lendd only to funeral homes, for “The bankers are experts in that industry and best able todetermins risk,” Landis said. High-net-worth individuals also might be willing to investt in small businesses as equitgy partners orangel investors.
If they believe they can get a bettert return by investing in a private company than in the stoc k market they will advancee the owner money for operating expenseas in exchange for repaymentwith interest, or in some casees an ownership stake in the business. this route isn’t appropriate for every Harris Smith, chairman of the Palatine, Ill.-basefd and a partner at accountingfirm , said angep investors might see a good opportunit y in certain businesses but are generally not a greatr alternative because wealthy individuals will not usually participats in such activity unless they get a high interestf rate.
As difficult as it can be gettinbg connected to the rightalternative lenders, Landisd and Smith said business owners still need to be aggressiv e in their due diligence. Landis recommended that would-bs borrowers start with their trade association and ask where they gettheidr financing. Find out who sponsors their because typically those are the same groups interestedx inyour industry. And she said to talk to peerss nationwide. Smith also suggested that businese owners ask their bankers for help locating alternativd sourcesof funding.
Once you’ve identified potential prospects, vet them with the Better Business Bureau and dig into theirdtrack record, including contacting previous customers. Ask the lender if it intendsa to fund loans directly orif it’s a broker. If it is actinbg as a broker, obtain the name of the ultimate lender to identifu the actual source ofthe funds. Landi s said to watch if they want high, up frontg fees. If you get ask why.
“It might be that you are askingv for a loanthat isn’t doable and you can restructure the projecrt to make it more suitable,” Landis