Going For Alternatives: RBF For Small Businesses

By on December 30, 2012

The moment the banks say no to owners of a small business, resilience and creativity arises. Great things do come is small packages and we must learn not to undermine these small enterprises. Banks may say no, but small businesses say there is a creative way that would lead to a yes.

Small Businesses

When an owner of an online retailer of comic books sought for a $50,000 loan from a bank to expand his comic business to a toy store for the holidays, he was simply turned down. Trying again with no luck, the owner ended up with about half a dozen of banks with no loan in his hands. Although the business had been going for 5 years, and it was profitable the owner rented an office and apartment, it turns out with no collateral besides the inventory.

Then, the owner came across and advertisement for the company Kabbage, an online company (2 years running) that offers cash advances to small enterprises. After an online application, the owner was approved with a $5,000 loan within just 5 minutes. He has lent a similar sized loan with a total sum of $50,000. This allowed him to expand his small business, his inventory of course and increased his yearly revenue by 50% to up to $500,000 for this year.

The Frustration

Small businesses are often frustrated by the tight lending policies by banks; this is an evident situation even after the Great Recession ended 2-3 years ago. The frustration has led to an alternative and now small businesses are looking into a new breed of lenders that are going against the very tight and conservative standards of banks.

The Alternative Lending System

The alternative breed of lenders use software to review banking transactions, online sales, and even comments from social media sites, these are just some of the hundreds of criteria the alternative lenders use to make decisions on loans. The system proves to be promising as loan decisions can be made in just a matter of weeks instead of months, a time frame we often see in banks and other conventional lending companies.

The alternative lending companies offer loans on a short term basis, they provide loans amounting from $50,000 to $150,000 to hundreds and even thousands of small business owners who are originally turned down by banks. According to the CEO of Multifunding, a loan adviser dedicated for small businesses, these alternative loaning companies are beginning to open a market.

There is a catch however; loans from these lending companies can be heavy for the borrower, with up to 20% to 60% repayment interest rates. It siphons cash that can be otherwise used for investment on the business. Bank interest rates that offer similar loans play at an average of 4.5 to 6% annually.

Though costly, many firms don’t have a lot of choices. In October of this year, big banks only approved 14.8% of the loan requests. According to finance experts, small businesses must have sterling credit scores, strong cash flows and sufficient collateral to become qualified for a loan, such requirement are quite difficult to complete in an economy recovering from a recession.

Alternatives for businesses that do not have the sufficient collateral required by the bank can turn to factoring companies; these companies buy sales invoices, or accounts that are receivable at a discount. This provides a quick, short term financing and effective rates at 30%.

This article is a contribution of John Michaels, writer of articles on instant loans, financial assistance and debt management for small businesses. John Michaels has a particular interest in small businesses and their impact on the macro economy.

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