After the credit crisis in 2009, financial institutions were forced to shore up their reserves and tighten their lending requirements.
The unintended consequences have been severe. Only the largest and most credit worthy businesses have been able to access capital. Small businesses have had to turn to nontraditional lenders who charge higher interest rates and more fees than traditional banks.
Fortunately, there are options that businesses can use to secure financing. Here are three alternative solutions that business owners can tap into.
Community Development Financial Institutions, or CDFIs, are nonprofit or bank sponsored loan funds that exist to stimulate economic activity in underserved markets. They provide technical assistance and advisory services to small and medium sized businesses. Some of the products that they offer include lines of credit, working capital, and equipment financing.
Their interest rates are reasonable and payment terms are flexible.
The second alternative financing solution is factoring, also known as accounts receivable financing. A business can raise capital by selling their accounts receivables, often at a discount, to a factoring company. This allows the business to meet its cash flow needs without acquiring debt.
3. Vendor Financing
A third alternative financing solution is vendor financing. In many industries, a vendor will allow extend credit to a customer to purchase its products. Once the customer sells the products to the end user, the business repays to the vendor. This kind of financing usually carries higher interest rates than bank financing and CDFI loans.
While there have been initiatives to spur traditional bank lending, the small and medium sized business community still struggles to acquire capital. Thanks to these nonconventional approaches, business owners can access solutions that will help to fund their business’s growth.