Alternatives to Bank Loans

In a recent article in The New York Times entitled “When Banks Won’t Lend, There Are Alternatives, Though Often Expensive”, author Ian Mount points out that alternatives to bank loans are on the rise in today’s rocky small business economy. He gives several examples of non-traditional financing options, of which this blog will discuss three: asset-based lending (factoring), lease-back lending, and cash advances.

Asset-Based Lending: Also known as factoring, this options refers to the process by which businesses sell their receivables to a factoring company. They then get 80-90% of the cash back immediately and the rest after customer repayment, less a percentage fee. This option is best for business-to-business companies that cannot wait for payment, and the cost is usually 4-5% monthly with an effective annual interest rate is typically between 18-30%.

Lease-Back: This refers to when a company sells its property, plant, and/or equipment, and simultaneously leases it back for cash. It is best for companies with valuable plant or equipment that are underutilized, and the cost is monthly lease payments plus the depreciation and tax burdens of equipment.

Cash-Advances: Cash advances take place when a company receives an advance sum from a lender and pay them back with percentages of their monthly card receipts until the loan plus a predetermined rate is repaid. This financing method is best for retailers and restaurants with limited financing options, and the cost is usually 20% and up.

All three are viable financing options for companies rejected by banks, or looking for fast cash alternatives. See the original article “When Banks Won’t Lend, There Are Alternatives, Though Often Expensive”.