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Bank Lending Alternatives for Small Businesses

Small business owners face countless obstacles in the lending process. Sometimes, they need a loan to purchase equipment or build a new facility; other times, they need capital to open a bank account or expand their inventory. The right financial services can help small businesses operate more efficiently and cost-effectively throughout the value chain. But finding the right lender can be difficult and expensive. That’s where alternative lending comes in. Alternative lending is a segment of the banking industry that focuses on assisting borrowers who may not have access to traditional loan sources. It does this by providing small business owners with short-term loans that are secured against real estate rather than personal property, and which do not have minimum interest rates or collateral requirements. Here are some examples of types of lending that may appeal to you:

Business Lines of Credit

Business lines of credit are short-term loans that provide a safe and easy way for owners to get money for equipment, inventory, or expansion. The loan terms typically state that the loan is granted unless the lender receives proof of financial difficulty. The protections for the borrower include an ability to pay the loan back on a regular schedule and an ability to self-insure. Some lenders also provide a grace period, so owners can arrange to pay the loan back on a less urgent basis, such as every other week. Business lines of credit are often marketed as an alternative to a line of credit or cash-out refinance loans. But they have their own risks, including the potential for the business to lose all or part of the loan.

Merchant Cash Advances

Similar to lines of credit, cash-out refinance loans also come with some unique risks. For one, the borrower may have to pay interest on the cash-out to refinance the loan even though it’s secured by the property. This interest, known as a cash-out interest rate, is usually higher than the interest rate charged on a credit card and can eat into profits otherwise available for expansion. Another risk is that the borrower may fall behind on payments. Unlike a line of credit, a cash-out refinance loan doesn’t require the borrower to make regular payments until the loan is paid in full. Payments may fall behind because the borrower is unemployed or working part-time and can’t find full-time work, or because the business is experiencing cash-flow problems and needs to cut expenses.

Working Capital Loan

A working capital loan is generally a short-term loan that is collateralized and secured against current inventory. The loan amount is typically less than the amount borrowed for a line of credit, but it’s still significant enough to secure against current cash flow. Working capital loans are best used when the borrower has cash flow problems that can’t be resolved quickly through other sources. Lenders generally require proof of financial difficulty, but the borrower can test the lender’s patience by showing that they have the cash to make the repayments even if they fall behind on the loan.

Equipment Loans

Equipment loans are like working capital loans for equipment. The lender assumes the equipment is worth more than the loan amount, and the loan is collateralized against the asset. The equipment is paid for in full at the time of the loan, and the loan amount is initially larger than the asset’s market value. Borrowers usually borrow money for equipment purchases for two primary reasons: to expand the current business and to take advantage of an opportunity to acquire an additional valuable asset. Equipment loans may be perfect for this purpose because they don’t require the borrower to pay off the loan until the expansion is complete.

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