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When It Comes to Alternative Lenders, Options Give You Power


Ben Goldstein


When looking for an alternative lender, it’s important to work with a company that you can build a long-term relationship with. Having access to different financing products can help you through different times of your business’s life-cycle — from the early days when cash flow is your biggest concern, to the expansion phase.

Of course, building a successful relationship with a capital lender depends on your ability to pay back what you borrow on schedule, minimize the cost of the capital you are borrowing, and maximize its impact.

Lines of credit, small business loans, and merchant cash advances all serve different functions during the growth of your business. But what are the best funding options available to small business borrowers, and when should you use them?

Merchant Cash Advances

Merchant cash advances involve selling a portion of your credit card sales to a lender; you get a lump sum upfront, and the lender takes out their cut until the funding is fully remitted. Using a merchant cash advance is usually about getting the capital you need quickly at a higher rate, in order to get future financing at a better rate.

This is generally one of the most expensive products that alternative lending companies offer, but we all have to start somewhere, and taking a calculated risk can help you build a positive relationship with a lender and take a first step in the right direction.

For example, if you are maxed out at your operational capacity and turning down orders or falling behind on them, then utilizing a merchant cash advance to increase your operational capacity — and generate more revenue than you otherwise would — makes financial sense. As always, the benefit has to outweigh the cost, so do the math in advance.

Another great use for a merchant cash advance is building up your own working capital during your busy season to ensure that when you head into the slower season or dip, you’ll have a safety net. The last thing you want to do is borrow from a position of extreme need. This will hurt your ability to operate and increase the risk of insufficient cash flow when paying back the loan.

Lines of Credit

When does using a line of credit benefit your business more than loan products (whether short-term or long-term)? If you rely on invoicing your customers and need the capital to build your accounts, make payroll, or keep inventory flush for your orders, it may make more sense to keep a revolving line of credit until you can build up enough equity in your accounts to have that inventory balanced.

When working to grow your business, often times you are chasing invoices — even when you are established — and working with a line of credit allows you to maximize your company’s ability to grow, give your clients time to pay, and continue servicing your industry.

Working Capital Loans

Borrowing money through a short-term loan product might cost you more than a traditional bank loan, but when you factor in the speed, flexibility, and smaller funding sizes offered by alternative lenders, working capital loans are often more attractive. Plus, the short terms for these loans — which are repaid in months, rather than years — help make borrowing more strategic. Often times we think that the smallest loan payment is the best thing for us, but when traditional loans are spread out so long, we end up paying for them long after we need the money.

Finding the right rate, terms, and ability to repay it is the sweet spot. In many cases, I recommend putting a little bit of pressure on yourself to succeed (i.e., taking out a six-month loan instead of a two-year term) to ensure you maximize the money you receive at the least amount of cost.

Business Expansion Loans

What if your business is past the startup phase, and working to take the next major step in your growth? Expanding your space, staffing up, and paying for updated equipment and technology can cost more money than a short-term loan can cover. You might consider applying for a traditional small business loan from a bank, but again, you’ll have to wait months for the funds, and the conditions and requirements can be very stringent.

Business expansion loans offer an ideal middle ground. They feature larger sizes, lower rates, and longer terms than working capital loans, while keeping the same speed and flexibility of alternative lending products.

Often times when you are looking to find financing at the expansion stage of your business, it’s hard to find the right situation that’s beneficial to you. You are not at a point where you want a new 10+ year loan to drag on your books and cut into your prime year profits. Working with an alternative finance company for a more targeted approach allows you to find the sweet spot for both parties between funding amount and length of payback.

Bringing It All Together

Ultimately, the goal is to find a financing partner that helps you grow. Though some traditional loans may have lower rates, those loans will also be over a much longer period of time, and when you consider all other factors involved in borrowing business capital — the time involved in obtaining the loan, the overall customer experience you get by utilizing non-bank lenders for your needs — alternative lending products can lead to great success for your company.

Finding an alternative lender who is constantly working to better underwrite your industry and specific funding needs allows you to get the best price for your capital. As these companies when work to better understand the applicants and their industries, they can continually help you get the best product for your business at every stage you need them.