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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   April 2008

Nontraditional Financing Opportunities

Show small-business-owner clients their options for beating a cash-flow shortage

The credit crunch is shutting many small businesses out of conventional lending sources. In the past, many of these borrowers refinanced their homes or took out lines of credit to finance their small businesses. Today, they need other choices.

Three nontraditional-financing outlets for such borrowers are credit cards, inventory factoring and hard money. Know the pros and cons of these products, and then explain them to your borrowers.

Credit cards

In some cases, small-business owners can actually do limited financing via credit cards. This option can be inexpensive if used correctly -- in other words, money should be paid back on time so balances do not accrue. There are usually no upfront fees. Also, it can be used almost instantaneously.

The small-business owners must have good credit, however. In addition, the balance must be paid in 30 days or large finance charges -- often more than 18 percent -- can accrue. If used incorrectly, credit cards can increase a small business’s debt load and lower the owner’s credit score.


Another option is factoring. With receivables factoring, invoices are assigned to the factor, which usually charges a fee of 2 percent to 4 percent for 30 days. If, for example, a small business sells a product for $100 and bills the customer, the factor would give the small business $96 today for the invoice. When the customer pays the invoice, the factor receives the entire $100.

Inventory can also be factored. In this case, a factor will make a loan to a small business with the inventory as collateral. Rates can be high for inventory factoring.

One benefit of factoring is that it allows small businesses to turn their working capital faster than waiting for customers to pay bills. It also provides an intermediate solution for cash-flow constraints. Further, factors base their lending decisions on the purchaser’s credit, not the small- business owner’s.

Factoring can be expensive for small businesses, however. For example, if a factor charges 3 percent for 30 days, then the annualized rate is 36 percent. In some cases, receivables factoring can also send the wrong message to a business’s customers.

Hard money

In real estate financing, hard money is essentially a nonbankable loan. With these loans, underwriting decisions are based on the borrowers’ hard assets. They can close within two to three weeks.

Hard money can be the cheapest of the three alternative-financing methods. Lending decisions are made based on the small-business owners’ commercial real estate as opposed to their credit. A hard-money loan can give borrowers a lump sum of cash. Finally, a hard-money loan can be amortized for as many as 30 years.

As a drawback, though, the small-business owner must own a commercial property with substantial equity. Also, most lenders only lend as much as 65 percent of the property’s value.

•  •  •

There is not one solution to fit all situations. Some small-business owners might be able to scrape by with credit cards to get over certain humps. Others might need a combination of these strategies to finance their working-capital needs.

By capitalizing on the opportunity to help small-business owners, you may be able to get through the credit crunch more easily.


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