The good news is that since the Great Recession of 2009, bank financing has become more available. The bad news is that the requirements are still pretty tough — particularly if you’re a small business.
If you want a loan from a traditional bank, the money’s there at reasonable interest rates — but you’ll more than likely need to produce solid collateral, reliable historical financial statements, personal guarantees, and a strong assurance that you can meet debt maintenance and other financial covenants. Still, the money’s there if you can qualify.
There’s also capital available at community and independent banks, which have increased in popularity and offer a good alternative to the giants. But don’t get too excited — these are still banks, and their requirements are not so different from the major institutions.
If you run a store or restaurant, then it may interest you that retail payment services like Square and PayPal offer their merchants cash advances based on their sales. Even some retailers — like Sam’s Club and Staples — have gotten into the small business lending game and offer loans to their members.
Then there’s another alternative: online lenders.
Led by companies that include StreetShares, Kabbage, Fundbox, and Bond Street, the online banking industry has exploded over the past few years, and the reasons are pretty obvious. Many of these services loan amounts as low as $5,000 to companies with as little as $60,000 in revenues, and often provide the cash on the very same day. Wow, right? But, like all good things, there’s also a catch: According to this recent summary from financial blog NerdWallet, interest rates can range from 6% to 76.5% a year.
Wait…what? 76.5%…a year? Is that a misprint? Nope. It’s true and it’s legal. What insane business owners would do this? Oh, I know a few — and they’re not as insane as you think.
Here’s one example:
John owns two coffee shops in my home town (the guy’s real and so is his story, but I’ve changed his name for this article). Things were going well and about a year ago he had the opportunity to lease space at a new, prime location for a third store. There was a lot of competition for the space and the landlord required a heavy security deposit — first, last, and an additional month’s rent — paid in advance to secure it.
John knew that the location was a moneymaker so long as he could get it. Unfortunately, so did a few other competitive merchants. The landlord gave John just 24 hours to come up with the cash, but unfortunately he didn’t have it all. What to do? A traditional bank would’ve taken at least a few days to approve this funding, if not more. So he went to an online banking service and had the funds in his account that day.
This lender charged about 40% annual interest. Did John pay that? No. He only borrowed the money for a couple of weeks from the online lender until a more formalized long-term line of credit with his bank could be established and then he paid off the online lender. Sure, he paid a steep interest rate for that period of time, but not for the entire year. In return, he was able to put the money down on the property and secure a prime downtown location.
He’s still there today. I recommend the mocha cappuccino.
Sometimes I meet business owners who shy away from online lenders or even from taking advances from their credit cards because they’re spooked by the high interest rates. They should be. Their concerns are reasonable.
But those interest rates are only insanely high if you maintain that debt for a long period of time. Don’t do that. But do consider these sources of financing if you need the cash right away and your intention is to pay it back within…say 30 days. Yes, you’ll pay a premium for the money. But at least you’ll have the money.
And if, like John, you can still realize a profitable return on investment — even when factoring in the higher financing costs — then you’ve made the case. Sure, 76% interest is super-high. But the cost of losing out on a long-term moneymaking opportunity is much, much higher.
Would you consider taking out a short-term, high interest loan for your small business?