No Guarantees is one of the cornerstones of Free Market Economics. There are no guarantees. Business success happens through methodical, daily efforts. Healthy competition in all sectors ensures that even the greatest company on earth can be quickly humbled by the next small, innovative enterprise to come along. The same goes with business financing. Many business owners are in the hot pursuit of a guaranteed loan. As surprising as it may seem, almost everyone who owns a business has been in this situation: wanting a guarantee—in writing—assuring the loan. In essence, everyone wants to know that their efforts are going to be worth the battle. Understandable as this impulse is, it is simply unrealistic.            In most cases, the loan amount issued by the lender is based on careful analysis of the borrower company’s financials (often verified through tax returns and projections), sales figures, and overall stability. Refer back to the 5 C’s of Lending for a better understanding of lender criteria. Other tangents can alter the loan process, such as unexpected discoveries of credit problems. Many entrepreneurs have a series of small business startups in their pasts; each of these past ventures will be subject to scrutiny during the loan process. THE RISK OF ALTERNATIVE FINANCING            To anyone who has been denied a bank loan for a small business, it may seem that the proverbial door of opportunity has closed. Many choose to continue looking for a solution. For most that are determined to start a small business, alternative business financing can be a feasible solution.             There are several types of alternative small business financing available to entrepreneurs, but it’s important to understand the risks involved. Some financing alternatives include factoring, commercial credit lines, advance-pay programs, purchase-order financing and supplier-guaranteed lines of credit. Even these widely accepted alternatives have risks including higher interest rates attached to private and commercial finance lines, and reduced realized profits—primarily with factoring loans and cash advances paid against Visa or MasterCard merchant account receipts.            As every situation is different, it is important to weigh these risks and how they can affect your small business’s bottom line. In the case of credit card advances, if the 7%-15% that the lender requires for each card swipe still nets your business the revenue it needs to remain profitable, then accepting a loan to get you through a rough spot could be a viable answer. Similarly, if receiving a loan for 70% - 80% of your accounts receivable balance will bring your books out of the red, then the ‘risk’ may not seem high.            There are 3 primary factors to consider when seeking alternative small business financing.

The first is the overall cost of the type of small business financing you are seeking to obtain. Beware of hidden fees and other costs that may not be disclosed by the lenders early in the application process. Fees typically appear during the closing, added to the total amount financed upfront.

The second factor to examine is how will affect your taxes. It’s often overlooked but a crucial part of consideration. If realized when it’s too late a business owner may be able to save on taxes through appropriate deductions and annual renewals.

Third and finally, be aware of how your small business credit score will be affected. Think about how much the small business loan will actually cost over time, with the other implications excluding the monetary expenses.

            StrongBusinessCredit continues to deal with clients who have already taken out alternative financing and those who are ready to do so. What we find constant and true is that no matter at which point we assume the process, the business owner always has room for improvement.  Through lack of time and know-how, the business owner always benefits from the assistance of a professional. In almost all cases, the situation comes down to one fundamental—planning. Revisit your business plan. Even if it seems completely redundant to you and exceptionally unnecessary, it’s absolutely crucial to keep revisiting the business plan and projections. Again and again.

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Ilya Bodner
Small Business Owner
Initial Underwriting Group