Creativity, Alternative Lenders, And Small Business Financing Comment Now Follow Comments
By Ty Kiisel, forbes.com
“The small-business community employs half of the private workforce and creates two out of every three net new jobs,” said SBA administrator Maria Contreras-Sweet
at a packed luncheon crowd at City Club Los Angeles, part of the Town
Hall Los Angeles speaker series. When talking about alternative lending
channels and their place in the market she included,
“I marvel at those
companies, Kiva Zip, PayPal, Square, Lendio, Kabbage . They’re all important alternative financing channels.”
Of course it’s rewarding to see our company’s named mentioned among a
list of the companies Contreras-Sweet identifies as some of the
important players in the alternative lending space.
She’s not the only one talking about alternative lending this week
either. Former SBA administrator Karen Mills, writing for the Harvard Business School, suggests, “Alternative players have the potential to fundamentally change the way in which small businesses access capital.”
I’m convinced the world of small business lending is changing and
agree with former administrator Mills when she suggests alternative
lenders will have a big part to play in the future. That being said,
many of the alternative small business financing tools available today
have been around for a while—although some are new. Charles Green,
author of the new book, Banker’s Guide to New Small Business Financing,
has started calling alternative lenders “innovative” lenders because
they are taking a more innovative approach to how they evaluate
potential small business borrowers and loan risk.
I recently spoke with David Gilbert of National Funding
about what his company is doing to help small business owners access
the capital they need to expand and grow. National Funding is not part
of the Lendio network, but has been around for about 15 years. The
reason I’m talking about them is because they are leveraging some
financial tools like equipment leasing that aren’t necessarily new to
the market, but fill an important niche. Gilbert suggests, “Some people
don’t really need a small business loan. They need an equipment lease.”
He argues we should be looking at some of the more traditional
alternative financing products with a new paradigm. “Since the financial
meltdown in 2008, many small business owners have become very debt
averse,” he said. “They don’t want to sign up for long-term obligations
any more.”
Of course this doesn’t describe every small business owner, but the
key to finding the right financing vehicle seems very dependent upon
both the lender and the borrower understanding the objectives of the
financing. “We’re asking questions to determine if the financing serves a
direct need,” said Gilbert. “Many business owners have a difficult time
articulating what the financing they’re looking for will do to help
their business—which sometimes makes it challenging to get the financing
they need.
With that in mind, here are three questions any business owner should
ask him or herself before they sign on the dotted line with any
alternative (or traditional) lender.
Do you know how you’re going to use the capital? I can’t count
the number of times I’ve spoken to a small business borrower who can’t
articulate what he or she plans to do with the proceeds from their loan
request. Most lenders will be very shy to offer funds to a small
business owner who doesn’t have a clear understanding of what he or she
wants to use the funds for and the value that will add to their
business.
Will the extra capital have a positive impact on the business?
My father (our family business was where my small business career
began) believed borrowed capital needed to have a positive impact on the
business and facilitate an essential business need, or he didn’t
borrow. If it wasn’t critical to the bottom line, he would do without
until he could invest either cash flow or savings.
That’s not to say he never borrowed, he did. He just made sure it was
going to add value to his company’s bottom line. This approach is even
more important as the cost of borrowed capital increases.
Do you know the numbers? It’s critical to know what the
financial reports are telling a small business owner about his or her
business. I understand that most Main Street business owners don’t go
into business because they’re jazzed about becoming a financial analyst,
but if a business owner can’t read and understand a financial
statement, a profit and loss report, or the other financial reports, it
becomes difficult to determine whether or not the business is even
capable of servicing any debt.>>>
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