In the current economy, liquidity is at a premium. Increasingly, alternative lending is proving to be a viable choice for many companies needing capital to help with cash flow, grow their business, or expand their operations. The reason is simple: lending requirements remain stringent. In fact, a 2012 Banking Trends Outlook Survey revealed that approximately 75 percent of banks plan to tighten or maintain their current lending requirements. That puts businesses in cyclical industries and those with cash flow inconsistency — like employment placement agencies — at a competitive disadvantage.
But what is alternative lending? In a nutshell, alternative lending allows companies to leverage their accounts receivable, inventory, and other physical assets as collateral to qualify for a flexible line of credit. Whereas with traditional commercial loans, banks look first to the cash flow for repayment, then to collateral.
Since many smaller businesses lack the credit ratings, track record, and luxury of time to pursue more traditional financing options, asset-based lending has taken on an even more vital role in supporting middle-market growth. What was once viewed as a “last resort” for financing needs is steadily becoming the first choice for many companies.
The continued growth we’ve seen in alternative lending reflects this shift. According to the Commercial Finance Association, the asset-based lending industry is now a $200 billion market. Small businesses have powered this growth, increasingly favoring the flexibility, ease in cash fluctuations, and access to capital they otherwise might not obtain with traditional financing.nan
With alternative lending gaining ever greater acceptance, what should companies consider when choosing the best lender to meet your specific needs?
Choosing a qualified lender and developing a partnership is extremely important to your company’s financial success. There are five primary attributes you want in a lender:
- Understanding – a bank that understands your needs as a business owner, not just a borrower, makes a better financial partner. Make sure that the lender you choose spends the time to find out about your current and future plans and how financing plays into those plans.
- Knowledge – having a deep-rooted knowledge of your industry means a lender can better tailor loans to your specific needs. A bank with experience in your industry can help you make better decisions, and learn from others’ mistakes.
- Financial stability – any lender that is not financially stable itself cannot help your company with your finances. Plain and simple.
- Regulation – banks that are regulated by the state and / or federal governments use accepted and approved accounting methods, best practices, and are insured. They also tend to have access to lower-cost funds.
- Partnership – a bank that can grow with the needs of the company, and wants to be a partner for your business is “invested” in your company and your success well beyond their lending commitment.
Although these five guidelines are imperative when choosing a bank, perhaps most importantly, companies should choose a lender they’re comfortable with, one that is interested in the well-being of the business beyond just the loan. Because in this challenging economic environment companies need a lender who will be there for them, work with them, and be a partner they can trust.
Increasingly, alternative lending is being recognized not only as a vehicle to help small businesses with cash flow needs, but as an important instrument for companies to grow, to expand operations, and to thrive. Finding the lender that makes the most sense for your company is the first step in making it all happen!