Why Millenial Entrepreneurs Will Be the Real Drivers of Alternative Finance

Long after the word “recession” stopped populating media headlines, the various forms of alternative, non-bank financing have continued to generate a more mainstream appeal , and this trend is only going to get stronger as the millenial generation continues to mature. This is good news for the alternative business finance industry, since this trend will likely lead to an increase in the number of young entrepreneurs and business owners in need of start up financing or a business loan.

Millennials represent one of the biggest demographic sectors in the U.S. Yet, according to a recent Bankrate survey, this group seems to be less active in traditional credit and financial markets. Among 18 to 29 year olds, 63 percent don’t have a credit card, and 33 percent are considered “under–banked.” This is compared to the 35 percent of adults 30 and over who don’t have credit cards.

Why is this happening? Many industry experts point out that after the recession, most banks severely tightened their lending standards and have yet to go in reverse. On top of this, millennials tend to have inconsistent income as a result of temporary employment, self-employment, career changes, or because they have started their own business. They come off looking financially unstable- to the banks at least. These trends, in addition to new financial regulations, such as the Credit Card Act of 2009, have made it much harder for millenials to obtain a credit card and thus begin to build their credit profile.

So, it’s not that millenials aren’t looking for credit. Many are; they just can’t get approved for it.

This opens the door wide for alternative lenders, particularly those that operate online. Many of these alternative online lenders, which include micro lenders, p2p platforms, and for business owners, and assortment of asset and revenue-based financing arrangements, rely proprietary algorithms to help them quickly determine who is fundable and how much of a financing risk a given borrower presents. Instead of looking primarily at a prospective borrower’s FICO score, these lenders consider other factors, such as financial account activity and in some cases even a borrower’s social media circles.

As the millenial generation of entrepreneurs and small business owners gets ever more comfortable accessing financing online instead of heading to their local bank, and as the banks continue to keep the funding pipeline closed, we should see even more players entering the field. There is little doubt that the alternative financing landscape will look vastly different ten years down the line- so different, that alternative finance may well be the new traditional.

The Pitfalls of Using Personal Asset Loans to Fund Your Business

Even though the worst of the Recession has past us over, and there are signs that at least some parts of the economy have rebounded, the traditional credit markets are still closed to the vast majority of small business borrowers. While many types of alternative lenders have since emerged to help fill in the financing gap, lately the use of personal asset loans has been garnering a lot of attention and popularity. But, do the risks outweigh the benefits of this kind of short-term financing?

What Are Personal Asset Loans?

Should you use personal asset loans to fund your business?While most people have heard about home equity loans or securing a bank loan with a valuable personal asset, the new class of personal asset loans work a bit differently. They are short-term loans that are secured with “luxury assets,” things like boats, classic cars, fine art, antiques, gold, and jewelry. You can think of the lenders that offer these products as a kind of “luxury pawnbroker.”

To get started, borrowers will need to fill out an application in which they describe the asset and the estimated market value. After the item has been appraised, the lender will typically offer borrowers 50-70% of their asset’s resale value. Loans of this type tend to range between $5,000 and $100,000 dollars with a 2-4% monthly interest rate, and the repayment period is generally no more than six to twelve months. If borrowers accept the terms of the contract, then the money is usually wired to them within 24 hours.

Should You Use Personal Asset Loans to Fund Your Business?

The answer to whether or not you should be using this kind of financing for your business really depends on your situation. If you can’t repay your loan, you will lose your valuable assets. So, you would first have to be certain that you can either repay on time or be comfortable with giving up the item(s) used to secure the loan. Plus, since the average interest rate of 2.49 to 3.99 percent is monthly, personal asset loans are more expensive than they seem. A monthly interest of 2.5-4% works out to 30-60% annually. Finally, once your business starts generating income, you will likely have other, less risky financing options to choose from that are based on business assets as opposed to your personal ones. The most prevalent choices include: business cash advances based on future credit card sales or total revenues, invoice factoring, and equipment leasing.

In short, personal asset loans are filling a need in the alternative business financing landscape, but they are definitely not for everyone. Once your business is generating revenues, you may have better options.

How to Fund Emergency Business Expenses

How can you get quick capital to help cover any unexpected emergencies or significant cash shortfalls in your business? Even if you have few assets, you may still have options as long as you put in little forethought before something happens.

Running a Business is Full of Bumps

One of the givens of running a small business is that they are going to be some bumps along the way. Those bumps get bigger if you are relatively new to running a business, you are new to a particular industry, or you are working in an industry known for it’s unpredictables- this includes many retail concepts or any business that is tied to agriculture. How you handle these snags can often determine whether or not your business survives and thrives or closes up shop.

A widely circulated statistic from the Small Business Association (SBA) is that over half of new small businesses won’t be around a mere five years later. It’s a sobering statistic that underlies the fact that running a business is hard. It takes not only a lot of trial and error and a lot of work, but also a combination of using the right tools and the right connections at the right time. Look at any interview, article, or book ever written about successful entrepreneurs, and you’ll see this same message over and over again.

A Plan for Emergency Financing Can Help Buffer the Bumps

One way to help soften the blow of a set back is to have a contingency plan in place. When it comes to accessing money to cover your back during a down time, you may have a few options:

Access a business line of credit. In an ideal world, you would just go to the local bank and set up a revolving line of credit to help you smooth out your cash flow and to act as a buffer should a sudden cash shortfall occur. But the truth is these days that banks are still reluctant to offer credit to smaller businesses. If you are one of the lucky few with great credit and a killer business model than you should give it a go at your bank and see if you qualify. Alternatively, you could get a low interest business credit card and use it for occasional charges just to keep the account open in case you need to use it for some future cash emergency.

Take a little money out each month. Put aside a small portion of your monthly sales and put it into a rainy day account. To make sure you actually put this money aside instead of spending it on your business, you can set up a payroll deduction or have withdrawals automatically sent to a designated savings account.

Use your tax refund. Another possible option is to send either all or a significant portion of your tax return into your emergency fund. Though it may not be enough to fully fund the account, it can at least give the your emergency funds a boost.

A revenue windfall. If you happen to have an exceptionally strong period of sales, then you should try to send a portion of this money to your emergency account. Like the tax return above, you may not necessarily fund the whole account at this time, but you can get much closer to your goal.

Asset-based financing arrangements. Asset-based financing arrangements like accounts receivables factoring, business cash advances, and revenue based financing all have the benefit of being quick and easy sources of capital. Even more, they don’t rely on your business’ credit profile or industry. Asset-based financing could be used as an emergency fund backup, such as when not enough money was put aside.

In short, when it comes to your business financing needs, don’t forget to create a contingency fund for those unexpected expenses that can crop up, and where you are unable to put enough aside, know what other options are available to you. You’ll be glad that you did.

A Quick Guide to the Confusing World of Alternative Business Finance

After the credit crunch and subsequent housing meltdown in 2008, the banking industry made a much publicized move to reign in small business lending. What had once been a moderate flow of small business finance to the nation’s smallest companies, then almost completely dried up. In it’s wake, various alternative lenders and other loan arrangements have all been clamoring for a slice of the business financing pie.

Though today, bank loans to small businesses seem to be making a come back, the truth is traditional financial institutions are still refusing to service countless small business owners- especially newer companies, companies with poor or little credit history, or those that operate in industries considered to be high-risk, such as food services or retail.

Thus, it’s no surprise that alternative lending among small businesses continues to surge. But even as alternative lending gets airtime the definition of just who qualifies as an “alternative lender” can get murky. The reasons: any non-bank lender technically qualifies for that description, and the alternative financing industry keeps expanding. Small business owners now can choose from a whole crop of new (yet similar-sounding) financing products that have only emerged in recent years.

So how can you as a small business owner looking for non-bank financing make sense of it all? The following are 10 explanations of the most popular forms of alternative financing available to small business owners:

Non-Bank Financial Institutions:

1. Credit Unions
Though they may look like banks from the outside, credit unions are non-profit cooperatives owned by their members. In order to maintain their non-profit status, credit unions have to restrict membership to a particular group of people, such as those attending or working at an educational institution, or residents of a particular community. The tax advantage associated with being a non-profit typically allows credit unions to offer lower interest rates on loans, and higher rates on savings accounts and other savings products.

Lately credit unions have been more aggressive in soliciting new accounts. The National Association of Federal Credit Unions (NAFCU) provides a list of its members online.

2. Community Development Financial Institutions (CDFI)

CDFIs are financial institutions that offer credit and financial services to economically disadvantaged and under-served communities within the US. These institutions may take on many forms including: a community development bank, a community development credit union, a community development loan fund, a community development venture capital fund, a micro-enterprise development loan fund, or a community development corporation. CDFIs are certified by the Community Development Financial Institutions Fund (CDFI Fund) at the U.S. Department of the Treasury, which provides funds to CDFIs through a variety of programs, yet they themselves are not government entities. The CDFIs were established by the Reigle Community Development and Regulatory Improvement Act of 1994.

To locate a CDFI near you, you can use this CDFI locator.

3. Micro Lenders

Microloans are short-term loans of small amounts, typically no more than $25,000 spread out over 5 years. There is a network of commercial microlenders and non-profits that offer these loans to small business owners. If you are a minority, have a low-income, or are seeking to start a business in an economically challenged area then your chances for being accepted for funding increase dramatically.

There are several umbrella organizations that deal with micro lenders and micro loans. The most popular are the SBA Microloan Program in the US, Accion USA, and Kiva.

Asset-Based Financing:

4. Accounts Receivable (AR) Lenders

Accounts Receivable (AR) financiers (also known as “factors”) purchase a company’s accounts receivable at a discount and in return provide the company with fast working capital. The financing comes in the form of a cash advance, often at 70-85% of the purchase price of the accounts. Interest rates generally are higher with factoring since the lender is assuming a higher level of risk. Many times, small business owners who have little or no credit history or who need a lot of money quickly will turn to AR financiers.

5. Business Cash Advance Companies

A business cash advance is a form of receivables financing typically based on future credit card sales. In this setup, the cash advance provider purchases some of the transactions from the business at a discount, which generally ranges between 20%-30% of the amount funded. In exchange, the business receives a predetermined amount of instant cash usually used as working capital. The cash advance company then collects a set daily percentage of future credit card sales until the full loan is paid off.

Cash advance companies usually require that a company be in operation between 3 and 6 months, and some financing companies may also require a minimum sales volume.

6. Revenue Based Financing

Similar to business cash advances above, revenue-based financing allows borrowers to pay off their loans based on a monthly allocation of the revenue their business generates. Though, unlike the cash advance, a business’ whole revenue stream is considered. While interest rates are again on the higher side, this financing setup allows business owners to maintain ownership of their companies while not being forced to borrow against their homes and possessions.

7. Purchase Order Financing

Also called inventory financing or PO funding, purchase order financing is a short-term commercial finance option that provides capital to pay suppliers upfront for products or inventory so the borrowing company doesn’t have to deplete its available working capital. The products or inventory then serve as collateral for the loan if the business does not sell its products or otherwise cannot repay the obligation. Inventory financing is especially useful for businesses that must pay their suppliers within a short payment cycle or a longer period of time than it takes them to sell off their inventory. It also provides a solution to seasonal fluctuations in cash flow and can help a business support a higher sales volume by, for example, allowing a business to purchase bulk orders of inventory to sell later on.

8. Lease-Back Programs

Also known as a “sale and leaseback,” lease-back programs allow the owner of a property or other valuable asset, such as equipment or vehicles, to “sell” it to a lender and then lease it back during a set period of time. Under this arrangement, the original property owner can quickly free up working capital while retaining possession and use of the property.

Some leaseback arrangements allow the lessee the option to buy back the property at a future date. During the life of the leaseback, however, the buyer derives tax benefits from the arrangement, such as being credited for depreciation of the property.

Peer-Based Alternative Financing Arrangements:

9. Peer-to-Peer Lenders

Peer-to-peer, or P2P lending is a form of financing that occurs directly between individuals or “peers” without the involvement of a traditional financial institution. Loan amounts are typically small, up to $25,000 and have loan terms typically lasting anywhere from 1 to 5 years.

Much of the success of P2P lending is a result of the social networking power and infrastructure of the Internet. P2P lending sites, such as Lending Club and Prosper, offer an online marketplace where borrowers and lenders can come together. Often, there will be several private lenders per borrower who each share in partially funding a a given loan amount.

These sites typically provide identification and verification services as well as an assessment of the borrowers’ creditworthiness and the risk involved in lending to them. Clear, precise documentation covers the loan’s terms and conditions as well as the repayment schedule and tax payments as determined by both parties.

10. Crowd Funding

With crowd funding, business owners and entrepreneurs can raise the funds they need by requesting a small amount of money from a large number of people online. By tapping into the power of the internet, entrepreneurs can pitch their ideas to a large group of people, who, if interested will respond by donating a small portion of the money they need to help them reach their target.

Unlike more traditional forms of business capital, the money raised through crowd funding is not directly repaid. Recipients may instead offer their investors some specified item or service in return for their financial support, such as a free sample of their product. In some, crowd funding models, such as the one supported by Sellaband, investors also get a cut of the recipients’ future sales revenues.

So there you have. Any one of these ten alternative financing models can help you access the money you need to start, run, or grow your business. But not every model is suitable for everyone. So be sure to do a little research and exercise your due diligence before signing any dotted lines.

SBA Lending: Small Businesses Still Waiting to be “Stimulated”

It all seemed so promising…

Last year, Senator John Kerry’s Small Business and Entrepreneurship Committee managed to not only save several small business loan programs that were effectively reduced or completely nixed under the President’s proposed 2009 budget, but they also managed to secure over $100 million in additional funding. This additional funding was supposed to cover “increased loan oversight and reduced fees, microloans, contracting assistance, Small Business Development Centers, Women’s Business Centers, veterans outreach programs, and technical assistance programs…”

Over the year that followed, the SBA has heavily promoted its flagship offerings to small businesses- namely the 7(a) and 504 lending programs. And recently, it caused a stir with its America’s Recovery Capital Program, or A.R.C. Under this program, previously profitable small businesses currently experiencing financial difficulty would be given the chance to catch up on their debt. The A.R.C. loans, which can go up to $35,000, carry no fees and no interest, and are to be used to pay down existing debt. What’s more, the borrowing company does not have to begin repaying the loan until a year after it receives the final installment.

It sounded great, and many small businesses owners across the nation no doubt breathed a sigh of relief expecting that help would come their way. But the help has been slow in coming. Even with all the money and high hopes, banks both big and small and other “preferred” SBA lenders have been reluctant to offer SBA- backed loans (or any loans for that matter) to small businesses (for example, read here and here).

Even though both the SBA and the media have reported that small business lending has increased in the last few months, it is too little, too late for many of the small businesses who need this funding the most.

All disappointment, frustration, (an even anger) aside, the reality is that most small businesses would do better to abandon hopes for a government life-preserver and instead consider alternative forms of financing, such as accounts receivables factoring and merchant cash advances or tapping into the resources of friends and family to stay afloat in these difficult times.




Bucking the Trend: Who is Thriving in the Credit Crisis?

With concern growing over the health of the global economy, many consumers and businesses alike are doing whatever they can to ride out the impending storm- and that can spell growth and financial opportunity for those who can capitalize on it.

So which sectors should still thrive in the current credit crisis?…

  • Financial consulting and tax planning. As the economic downturn forces businesses and consumers to focus on savings, the need for professional financial consultants and tax planners will only rise.

  • Accounting/performance management software. Any software applications that are designed to increase performance or efficiency, such as accounting suites and CRM packages, should remain in strong demand among businesses seeking to preserve their profit margins and maintain their competitive edge.

  • Outsourcing services. As businesses seek to reduce costs, expect a continued increase in infrastructure management and applications services. This also spells good news for free-agents, telecommuters, and “momprenuers.”

  • Telecommunications. Manufacturers of mobile devices and telecommunications equipment as well as supporting software should continue to perform strong as businesses rely more on telecommunications to reduce the ever rising cost of travel. Reliance on IP data, such as VoIP, is also expected to increase among small and mid-sized businesses due to the tremendous cost savings.

  • Online Marketing. By tapping into web-based marketing, businesses have several relatively cheap alternatives to traditional marketing at their disposal, such as e-mail marketing, blogging, and sending out newsletters, press releases, and articles. In fact, Google recently announced a 26% rise in their third quarter profits that they attribute to the fact that “targeted, measurable ads” are becoming more important to advertisers looking to reach as many possible customers while operating on a tight budget.

  • Entertainment. Video game sales are on the rise as consumers with tight budgets are foregoing travel, trips to the cinema, and dining out in favor of staying in.

  • Alternative financing. In this shaky financial climate it is no surprise that it is getting increasingly difficult for American small businesses to receive traditional bank loans. There has thus been an ever growing trend towards alternative financing ranging from the risky high, interest payday loans to the more mainstream invoice factoring, equipment leasing, and business cash advances.

image credit: http://www.flickr.com/photos/thetruthabout/

Who Finances the Financier?

We all know that it is hard for small businesses to get financing these days from banks – it was never a piece of cake, and now that the credit crunch is on for so long we see it has gotten ridiculous.  But… did you ever wonder what a bank does when it needs financing?  Yes, banks need money too!  In fact, banks don’t just give you a hard time when you want a loan because they are unsure if you’ll default — they sometimes just don’t have the money.

Lenders, especially small ones, struggle regularly to find investors.  This is in part because of federal regulations placing restrictions and rules on investors who invest in a lending institution.  Basically, if a private equity fund (or other investment entity) owns 9.9% or more of a bank, then they are required to do special reporting and subject itself to regulatory scrutiny.  Beyond that annoyance, in order to own more than 24.9% of a bank, an entity has to register as a “bank holding company” and must be a “source of strength” for the lending institution.

To say the least, these can be big deterrents to investors considering investing heavily in a bank — when combined with the uncertainty about the future of lending, this makes for a shaky proposition for a bank in search of cash.  If the bank doesn’t have cash, it can’t lend you or your business any either!

It was recently reported in the Wall Street Journal that officials from the Fed have been meeting with various buyout firms to brainstorm issues and solutions which they face when considering investing in a bank.  If they succeed in finding a way to reinterpret /re-legislate the current laws, then more private equity firms may be able to invest in banks.  The real question is: given the current lending crisis, will any one will want to invest, even if the red tape is cut?

If you don’t want to wait to find out and you need cash for your business today, then check out alternative financing options like credit card factoring and business cash advance.

5 Reasons Loan Sharks are Better than Family for Borrowing

1) You don’t have to worry about the loan shark taking the risk.

If you think your friends or/and family might lend you money, even though traditional bankers are saying no, then you probably have a pretty good relationship with them. You believe they care about you, and you probably feel the same way about them. If you don’t realize that there is a chance that you business can fail, then you shouldn’t be going into business. Whether due to external factors, or your own mistakes, any business can fail. Is this a risk that you feel comfortable asking your friends and family to take? Whether they invest in equity or debt, they should understand that there is a chance that the money might be lost. Since you care about your friends, you might not want them to take that risk.

2) If you can’t repay the loan shark you lose your credit, and maybe your house. If you can’t repay your family, you may still risk losing your credit and your house – but, more important to some, you also risk losing your relationship with your family member. When you accept investment/a loan from friends and family, experts agree that you should have it all written down, including collateral. You are not necessarily eliminating the risks of a bank loan. If you don’t want your friends to take as big a risk in their investment, you should certainly try to make it just as risky on your side as it would be with the bank. However, there is also your friendship at stake. Is this something you want to put on the line?

3) The terms of the loan are very clear when you work with the loan shark. Misunderstandings abound when accepting money from family and friends. Whether the unclarity surrounds the framework (equity, gift, loan) or over the terms (repayment method, interest, collateral) there is more than enough space for confusion to deter even the most loyal friends. It also puts your benefactor in the uncomfortable position of having to charge you interest, or requst collateral. This can put a strain on the friendship by itself, because both of you may be wondering if your friend would actually put you out on the street if it came to that.

4) The loan shark won’t ask you why you are going to London this summer, yet you were late with a payment last month. Don’t forget that family and friends know what you are doing and may see you on a regular basis. If you get a nice new watch, or go on an expensive vacation before your business is really booming, it could put a heavy strain on your relationship – and might elicit annoying comments. When working with a loan shark, this is a nonissue.

5) You don’t share mutual friends/family with the loan shark.Perhaps one of the biggest challenges is that loans rarely stay secret. It might come up when you all go out for dinner, or when you are talking to each other in church. But is very unlikely that it will stay between the people involved. It then has the power to taint your entire social life, especially if your business takes a turn for the worse. Think about it: Do you want to risk losing your parents retirement money, getting nagged constantly, and possibly losing your business and your family support network at the same time?

Be smart and think about all the possibilities. If in the end, you still want to go with a family/friend loan, I suggest you use a third party as a go-between to take some of the strain out of your relationship. One such company is Virgin Money. If you decide that you’d rather pay a bit more, and keep your friends and family out of the equation, then there are many different types of companies that offer alternative financing to businesses who are unable to get traditional loans.