One of our main concerns is whether or not small businesses are able to gain the funds necessary for success. This is easier said than done. For small businesses it may often seem like options are limited, but it’s important to keep in mind that traditional lending is not the only means by which companies can access capital. A burgeoning world of alternative lending options is available.
Due to the tumultuous nature of today’s economy, many entrepreneurs and small business owners do not have great personal credit. Larger traditional banks tend to look more closely at personal credit history than other aspects of the application, especially when dealing with smaller, less-established companies. Many small and new businesses have yet to establish business credit and cannot offer sufficient collateral. This means that if a business owner’s personal credit score is damaged, it might hinder their ability to secure loans from traditional lenders. This is where revenue-based financing can bridge the gap between small businesses and accessing capital.
While traditional lenders may rely more on personal credit, credit history, and collateral, revenue-based loans are awarded based instead on the company’s ability to maintain a certain amount of revenue flow. This means that companies pledge an amount of revenue, normally between two to eight percent, until the debt and interest are repaid. If no revenue is collected for that month, the company is not expected to pay.
Revenue-based financing can also usually be accessed more quickly than traditional methods. Instead of going through the traditional procedures, which can take months, revenue-based loans usually can be processed and used within 48 hours. If your company needs funds fast, this could be the right alternative loan option for you.
One new program that has joined the alternative lending scene is Bentley Capital Ventures’ revenue-based loans. Nick Bentley, a managing partner of the company states, “Business owners who are cash flowing, regardless of their personal credit, are an attractive lending risk. Offering business owners a cash infusion based on deposits is low risk. We simply are filling a void in the marketplace to business owners in need.”
These loans may be an attractive alternative to traditional methods, however it is important to remember that traditional loans, while oftentimes take longer and more effort to acquire, might be less risky than the alternatives. While revenue-based financing may give small business a quick infusion of cash they need, they can have rather hefty interest rates ranging from 18 to 30 percent. If a company does not do well financially, they will face longer periods of time with these high interest rates, costing them more over the long haul. On the other hand, the better a company’s performance, the quicker they will pay off their loan, and pay less in interest. Alternative loans are often stepping stones to traditional lending options once your business has become more established.
Regardless of where a company accesses capital, it is important to make sure the business owner fully understand any contract before signing it. If that means hiring a third party to look over everything, it is better to take preemptive measures to ensure the safety of the company than run the risk of signing a contract that could compromise the business.
Want to learn more?
Here is some more information on alternative lending and small businesses:
Photo Credit: Mark Moz, Flickr