Business Loan Alternatives
Although some banks have loosened up their requirements for business loans over the last few years, many companies still have trouble qualifying for a conventional bank loan. Successful, growing companies often have the most trouble getting the financing they need. You would think that banks would bend over backwards to lend to them. Quite the contrary. Banks offer very low loan rates, but are very conservative. They base their lending decisions on a company’s ability to repay the loan based on their financial health. This is based primarily on the company’s past performance. This is where a growing company runs into trouble. The working capital needed to support their growth is often greater than previous results will justify.
There a many other reasons a company may not qualify for a traditional bank loan. Among them are:
- A weak balance sheet (too much debt)
- A loss in a recent year
- A tax lien
- A previous bankruptcy
- Poor personal credit of the owner
- No business or personal collateral
- A short time in business
- Foreign ownership
Factoring (Accounts Receivable or A/R financing) may be a viable solution when bank financing is not available. If a business has a sufficient amount of receivables, they can be used as collateral to obtain the financing they need to support their growth. Most A/R lenders are primarily concerned with one thing: Will the client’s customers pay their bills? If so, regardless of their client’s financial situation, they will offer a line of credit based on the client’s receivables (usually 80%). A big advantage to a growing company using this type of financing is that the credit line will automatically increase as the A/R increases. This contrasts to a bank line of credit. Banks will require a client to re-apply whenever a credit line increase is requested.
Although Factoring is more expensive it is an attractive financing solution for growing companies when bank financing is not readily available.