Creating a Path to Bankability

As a follow-on to last month’s article about surviving an SBA loan rejection, the following from contributor Ami Kassar is presented for your consideration:

There will likely always be a population of businesses that are not bankable and cannot get a loan backed by the U.S. Small Business Administration. Owners of these firms are left to turn to alternative lenders, even though the funds will generally come at a much higher cost than what’s offered by an SBA lender or traditional bank.That being said, in an efficient market, alternative lenders could be a means to an end, a stepping stone for a small business to affordable and sustainable funding.

While “alternative lending” is a hot buzz word today in the press and with venture capitalists, it’s really not a new phenomenon. It started decades ago with factoring, in which lenders advance money to a business based on work they’ve invoiced and completed. This product can help a small company stay afloat as it works to become profitable and bankable. But factoring is only an option for companies that sell products or services to other businesses on terms.

Next, came the birth of the cash-advance business. Loans provided by these companies typically come with six-month terms, with the principal and interest being debited out of the borrower’s account in daily increments. On average, such firms charge an annualized interest rate of between 20% and 60%, and sometimes as much as 200%.

Can you imagine buying a car and having six months to pay it back with payments starting on the first day you drive it off the lot? Hard to stomach? So what often happens is that the borrower needs to reload or renew the loan after just a few months to get more time to pay it off. And as this cycle accelerates, interest fees accrue, and the borrower is stuck in a viscous cycle that he or she can’t escape.

Fortunately, the alternative-lending landscape has evolved over the past few months. New alternative players have arrived such as Dealstruck Inc., Fundation Inc., Funding Circle Ltd. and LendingClub Corp. and on average, they charge an annualized interest rate of between 6% and 29%. They offer borrowers up to five years to pay loans back with no or minimal pre-payment penalties. This is a good amount of time for a business to make an investment and pay back what it borrowed

We’ve also recently seen the launch of SmartBiz, an SBA Express program that is leveraging technology to offer borrowers up to 10 years to pay back their debts.

Borrowed money should always be seen as a means to an end. In some cases, the “end” is to pay the loan off, and in others the “end” is entering into an affordable, secure bank loan.

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