There are many requirements of banks when lending to small businesses to include immaculate credit, positive cash flow (profitability) and adequate collateral.

However, not all borrowers have to meet those ridged standards.  There are some loan products that, depending on the collateral, do not require stellar credit or two to three years of profitability.

There are three major loan products that small businesses can take advantage without meeting all the major lending requirements mentioned above:

Account Receivable Factoring.  Called invoice factoring, where a business owner, who has generated customers, completed jobs or orders for these customers and is just waiting to be paid, can factor these receivables or invoices for cash now – giving the business owner working capital to generate more business, complete more jobs, pay suppliers or make payroll.  Banks usually lend 80% of approved invoice amounts then recoup their advance (loan) plus a small fee when the customer pays the invoice.  Since these lenders are more concerned about the business being paid from the customer, they do not look very hard at the business or business owner but more at the creditworthiness of the business’s customer as it is their ability to pay and credit that matter in these lending decision.  Lastly, since these lenders (accounts receivable factors) now have a stake in collecting from your business’s customers, they will also help to ensure timely collections – further saving the business owner time and expense.

Purchase Order Financing.  Where a business has landed a customer and has signed a contract that outlines what the business will provide and the payment for those products or services.  However, if the business finds itself short of working capital to complete the job or order, there are lenders who will front the money needed to get the job done – to purchase inventory, engage a manufacturer or hire more labor.  The business gets the cash to complete the order – then, when completed and the customer pays, the lenders receives payment for the upfront advance plus a small fee while the business owners gets to keep nearly all the profits.  Again, the underwriting decision is based on the strength of the business’s customer and not on the strength of the business owner.

Business Cash Advances. Many businesses accept credit cards as a form of payment.  If a business can show a history (at least four months) of accepting credit cards – many lenders will advance against FUTURE credit card sales.  This means that these lenders will provide the business with needed working capital for growth and expansion.  These advances are repaid from a small portion of future credit card sales (usually around 5%).  This still leaves the business with 95% of these same future sales for their continuing operations.  The real bonus comes as the repayment of these advances are not based on a fixed monthly payment but a small percentage of future credit card sales.  Thus, if the business has a slow month, they are not straddled with a huge fixed payment but will still only pay around 5% of whatever is collected from those future credit card sales.

When the bank or lender underwrites these alternative loans, they are not too concerned about the strength of the business or business owner but in the strength of converting those assets into payments.  The idea is to leverage business assets for cash that can be used to grow the business – leading to a stronger company who can then meet other stringent lending requirements in the future. 

Joseph Lizio holds a MBA in Finance and is the founder and owner of Business Money

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