It wasn't that many years ago that small business owners needing capital could choose to go to a bank…or a bank…or a bank. Depending on a particular bank’s lending criteria and the amount of risk that it was willing to assume, business owners could get a loan (maybe) or a line of credit. The application process was pretty complicated and time consuming, and even with approval, the wait for funding was typically weeks or even months.
But in recent years, small business financing has, in many ways, been revolutionized. In simple terms, what’s happened is that the marketplace spoke (Small businesses needed some other choices), and various entities responded by stepping in to fill that need. This phenomenon was unfolding even before the economy hit the skids in 2007.
But that’s when “alternative” financing for small businesses really took off. No one could have foreseen the economic dynamics at play. Over the course of the downturn, banks became more risk averse and tightened credit, which meant their volume of lending to small businesses dropped like a stone. But small businesses still needed capital—more than ever. Non-bank sources further stepped up their offerings to small businesses.
The economy’s come crawling back, and huge numbers of small businesses are now in the habit of looking to non-bank sources for capital first, not as a fallback. In fact, many of these non-banks are no longer considered “alternative” and are instead fully main stream. Who are they, exactly? Some still see themselves as “alternative,” while others call their services “specialty financing,” which isn’t very descriptive either. At the core of these non-banks are companies that offer merchant cash advances. Businesses get cash upfront in return for a percentage of future credit card sales until the financing amount is repaid.
There are a number of different merchant cash advance providers. We’ve been one of them for more than a decade—and still do offer this type of financing. But this is where the “alternative” financing story gets really interesting. The big news here is small business loans, which Business Financial Services has been offering for the past couple of months. Now that was a big move—and a significant one, too. Why? Because it marked a real convergence of the so-called “alternative” financing that we provide with that offered by traditional lenders.
Even so, while “loans are loans” in the general sense, there are some significant differences between traditional bank loans and what we at Business Financial Services are offering to small businesses. First and foremost, the basis for banks’ willingness to lend is risk: How risky is your business? How much risk are they willing to assume?
Of course, nobody wants to take on risk unnecessarily, and that includes us. But the BFS model for approving and lending to a small business has more to do with the financial health of the business and its outlook for the future. How sound is your operating model? What do your projections for future growth look like? And most importantly, Is this in the best interest of your business? The bottom line is this: We look at the fundamentals and when they are sound, we are essentially “betting on” your success. Come to think of it, we’ve always believed in and “bet” on small business, even staking the success of our company on that core belief.
There are other differences, too, between the loans we offer and more traditional loans. And those differences have everything to do with our understanding of our customers and a desire to make the process as streamlined and easy as it can possibly be. Our application process is relatively uncomplicated. We do everything we can to expedite the approval process, and once approved, funding is quick—within five business days. Why do we do it? Simply, we do it for our customers. We understand that when small businesses are faced with challenges and opportunities that will affect their future growth, they need working capital now.
We’ve worked hard to blur the lines between traditional lending and “alternative” financing, and in some basic ways, there is virtually no separation between the two. That’s a good thing for small businesses that depend on access to working capital. But we like to think that we’ve gone beyond achieving parity with banks and have set new standards—in accessibility and in responsiveness, but also in our willingness to bet the future on this country’s small businesses.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
Have you worked with an "alternative" provider in the past? Share your business financing experiences in the comment section below.