Alternative bank financing has increased considerably since 2008. Unlike bank lenders alternative lenders are becoming increasingly important for a growth potential for future earnings and asset values rather than the strength of the historical profitability or creditworthiness.
Alternative lending rates may be higher than traditional bank loans. However the higher financing can often be an acceptable or lonely alternative in the absence of traditional funding. The following is a rough outline of the alternative lending landscape.
Factoring is the financing of accounts receivable. Factors are more focused on the collateral security rather than the balance sheet strength. Factors borrow funds up to a maximum of 80% of the claim. Foreign claims are generally excluded as are common claims. Receivables older than 30 days and any accounts receivable are usually discounted over 80%. Factors usually handle accounting and collection of receivables. Factors usually charge plus interest.
Capital based lending is the financing of assets such as inventory property and certain intangible assets. Share based lenders generally do not borrow more than 70% of the asset value. Asset based loans can be term or debenture loans. Share based lenders usually take a final fee and interest. Assessment fees are required to determine the value of the assets.
Sales & Leasing Back Financing. This method of financing also means the sale of real estate or equipment at a market value which is usually determined by an assessment and leasing of the asset back at a market interest rate of 10 and 25 years. Financing is compensated by a leasing fee. In addition a tax liability can be reported at the sale transaction.
Purchase Order Trading Financing is a fee based short term loan. If the manufacturers credit is acceptable the Purchase Orders lender issues a credit card to the manufacturer that guarantees payment for products that meet predetermined standards. When the products are inspected they are sent to the customer often manufacturing facilities are abroad and an invoice is generated. At this point the bank or other source of funding pays the PO lender for the advanced funds. When the PO lender receives payment it subtracts its fee and sends the balance to the business. PO financing can be a cost effective alternative to keeping the inventory.
Non bank financing
Cash flow financing is widely available by very small companies that do not accept credit cards. The lenders use the software to review online sales banking transactions bid history delivery information customer social media comments ratings and also restaurant health points when applicable. These metrics provide data that strengthens consistent sales volumes revenue and quality. Loans are usually short term and too small amounts. Annual effective interest rates can be substantial. But loans can be financed within a day or two.
Merchant Cash Advances are based on credit card fees and electronic payment related revenue streams. Advances can be secured against cash or future credit card sales and usually do not require personal warranties or warranties. Advances have no fixed payment schedule and no restrictions on corporate use. Funds may be used for the purchase of new equipment expansion repayments of debt or taxes and emergency financing. Typically restaurants and other retailers who do not have sales invoices use this kind of financing. Annual interest rates can be burdensome.
Non bank loans can be offered by finance companies or private lenders. Repayment terms can be based on a fixed amount and a percentage of cash flows in addition to a share of equity in the form of warrants. In general all terms are negotiated. Annual rates are usually significantly higher than traditional bank financing.
Community Development Funding CDFIs usually lend to micro and other non credit companies. CDFI can be compared with small social banks. CDFI funding is usually too small and prices are higher than traditional loans.
Peer to Peer Lending Investments also known as social lending is direct financing from investors often reached by new companies. This form of lending investment has grown as a direct result of the 2008 financial crisis and the bank credit increased. Advances in online technology have facilitated growth. Due to the absence of a financial intermediary for lending equilibrium investments are generally lower than traditional funding sources. Peer to Peer lending invests can be directly a company receives funding from a lender or indirectly several lender pool funds.