Alternative working capital for small business is quickly becoming the norm for funding. More and more businesses have been turning to this form of capital over the past 3 years. Large amounts of money is being invested into this space by Wall Street. This has become a new asset class for accredited investors to add to their portfolio. While doing so, small businesses in need of capital are benefiting.
Small Business Alternative Working Capital
Small businesses that reap most of the rewards from this influx of money are those looking to borrow less than $100,000. This sector of business borrowing is overlooked by traditional banks. Unless you already have a great relationship with your bank and have established a line of credit of some sort, there is no way you will be approved for a loan quickly, if at all.
Approximately 80% of small businesses applying for a loan under $100,000 are declined. This is usually due to a low personal credit score, a short time in business, lack of a solid business plan, or because they are deemed to be in a high risk industry. Alternative working capital solves all these issues.
Personal credit is not a primary factor in getting approved for an alternative business advance. Usually FICO‘s over 500 have no issues, but a low FICO will be a factor in determining the cost so it is something to keep in mind. The business performance and cash flows are the driving forces behind alternative business lending. Lenders use your bank records to determine how much they can lend you based on bank balances, number of deposits, negative days (if any), and industry type. The length of time you have to repay is based on two things; credit and industry type.
Cost Structure of Alternative Working Capital
This type of borrowing does come with a cost. It will be significantly higher than a bank loan. The terms will be a lot shorter as well. Alternative working capital should be thought of as an option if you’ve been declined by a bank. It is here to provide a short term answer to a business problem like making payroll, buying inventory and supplies, new hires, paying taxes, or expansion. The uses are endless but should always be geared toward improving your business in some fashion.
The cost of borrowing will range between 9% and 48% with repayments between 3 and 12 months time. In addition, repayments are taken electronically from your operating account Monday thru Friday, so there are no monthly payments. This helps mitigate the lender’s risk. The alternative lender is not taking any equity or collateral, so it is very risky for them. If you are declined by your bank for a small business loan, think about alternative working capital via the alternative lending sector.