By Kris Roglieri, CEO, Prime Commercial Lending and Co-owner, Durham Commercial Capital
Alternative lending has been in the news lately. On September 10, Bloomberg Businessweek ran a story titled: “What Do Small Businesses Need Banks for, Anyway?” This was followed up a few weeks later by a post in the New York Times’ “You’re the Boss” blog, “The Dangerous Appeal of Alternative Lending.”
Ever since the credit bubble burst in the fall of 2008, debt has become to many a proverbial, rather than just literal, four-letter word. As a lender to small businesses, I have a perspective to share that is often overlooked, and very rarely discussed:
Capital is expensive for small businesses. Period. And the smaller the business, the more expensive – relative to what larger businesses would pay – the cost of capital is.
If a prospective client comes to us who qualifies for traditional bank financing, we tell them to go there, post-haste. We don’t compete for the banks’ bread-and-butter business, by and large. But most – 95% or so – of our clients cannot get financing through a bank. And sometimes, those that qualify for bank loans work with us instead, as they recognize that we offer a significantly more streamlined process and a different perspective on qualifying applicants.
The bottom line? We provide an alternative to … well, nothing. It used to be if a bank said “no” that was that. Today, as the old song says “it ain’t necessarily so.”
Is what we provide more expensive than “prime?” Yes. But that is also relative. What is the cost to a business of no available capital for expansion? Pretty high: stagnation at best, insolvency at worst. Lost business, lost wages, lost taxes, lost livelihoods. Pretty expensive to all concerned, for business owners, employees and communities.
The lending that my companies – Prime Commercial Lending and Durham Commercial Capital – specialize in offer a real alternative to small businesses, based on:
–Looking forward not back to the future. We base our credit analysis on future revenues, not past performance as banks do.
– We take the risk. Our non-recourse loans mean that there is no future liability exposure for the business owner, no personal guarantees, no collateral, no forward exposure. It is all on us.
There is, of course, a cost associated with assuming that risk. But again, compared to what? We can provide a business with immediate access to cash, a less intrusive and time-consuming process than a bank loan typically entails, and a very quick process overall.
In his NY Times blog post, Ami Kassar, a loan broker, notes that Merchant Cash Advances — a form of financing that is typically very short-term and used to smooth out cash flow – carry an interest rate of 20-40%. This is true, if these loans were used that way, but they typically are not. They are designed as a short-term aid for very specific situations where businesses cannot get other types of funding.
Is it higher cost than a prime loan to a large multinational business? Of course. But the risk is priced appropriately and in most cases, lies with us, not the business. Ask any business executive if laying off credit risk is a value-added.
Another form of financing that is also misunderstood is factoring. Comparing it to a traditional loan product is misleading. It is apples and oranges.
There is no interest rate, per se, but rather a discount paid on the revenues financed. We take on the credit risk, removing that uncertainty from the business, and through non-recourse factoring, are more like credit insurance than a loan. Any business under $10 million in revenues is unlikely to have credit analysts on staff, or to even conduct rudimentary credit reviews on their customers, so they are essentially gambling with their revenue stream. We eliminate that credit risk.
Of course, a business owner can always sell a stake in the business – give up equity – to outside investors – or sell if he can find a buyer. But that seems antithetical to most and often involves loss of control, independence and future profit participation. In many ways, it the MOST expensive form of financing.
Most business executives we work are happy to have alternatives and can weigh the pros and cons, risk and reward, and tradeoffs and payoffs. They see alternative lending products as a way to continue pursuing their dreams and building a more profitable future.