Non-bank Finance
How to Find Alternative Funding for Your US Expansion
When you’re looking at financing your new US venture, it’s natural to consider traditional bank sources for lines of credit and business loans. However, for many European entrepreneurs, securing funding from traditional US banks is not feasible.
The effects of the 2008-2009 recession has meant that banks have become far more risk-averse than in previous times and their lending criteria are now much stricter. This has meant that many businesses have struggled to secure bank financing. European business owners, in particular, may face obstacles especially when they are new to the US market.
If you are unable to obtain a line of credit with a US bank – don’t be disheartened! In recent years, several ways to obtain alternative and non-bank funding have become increasingly popular and in some cases a far more attractive option for many entrepreneurs.
In this guide, we’ll take a look at some alternative funding sources that could be available to help finance your US expansion.
The Rise of Alternative Lending
Many European business owners find that tight restrictions on lending have meant their applications for bank financing are regularly turned down.
This could be for a number of reasons, for example:
Not enough credit history in the US
Poor credit rating
Not been in business for long enough (less than two years)
Cash flow is not considered strong enough
The businesses industry is considered risky by traditional lenders
A potential borrower doesn’t have enough collateral
These difficulties have meant that currently, an estimated 80% of small businesses in America get turned down for a loan from banks. But, the great news is that alternative financing methods and more creative ways of lending have been developing in the last few years. Many of these lenders are far less risk-averse than banks are.
What Makes Alternative Financing Attractive?
The obvious answer to what makes alternative and non-bank financing attractive is that in many cases, it’s much more easily available than bank financing.
Alternative lenders do not have the same qualifying restrictions that banks do and in many cases are more open to lending to newer businesses and those with no or low credit scores.
In addition to these benefits, alternative financing is attractive for many businesses because:
They often have a quicker and more streamlined application process. Bank applications are often extremely lengthy, with a large amount of paperwork that requires lots of complex financial information. The approval process and release of funds can take two months or more. In contrast, many alternative methods of financing are much quicker. Some applications can be completed online with a decision in 24 hours and funds released within 48.
Lack of collateral requirements. Many banks ask for collateral to secure a loan. Alternative lenders tend to take more risk and ask for less collateral but mitigate this risk with slightly higher interest rates.
Wider decision-making process that focuses on more than just a credit score. Alternative financing sources often focus on how your business is making money and in other cases, your qualifications and experience to decide whether to offer you finance.
Alternative financing is friendlier to start-ups and new businesses. Because banks want to minimize their risk, they prefer to lend to established businesses with a checkable US history. Alternative financers are more likely to lend to new businesses if they can see a great business plan and potential.
Depending on the source of alternative funding there is often more flexibility in how you use the funds. Many banks offer business loans for specific purposes such as building inventory or equipment funding. Alternative financers are less stringent about what business aspects funds are used for.
Many banks prefer to lend $200,000 or more. If you are looking for a smaller amount for a short-term cash infusion then alternative funding can be a great source for you.
As you can see, there can be many benefits to choosing alternative financing to help fund your US expansion. It’s important to be aware that different sources of non-bank financing might have different requirements and term lengths.
In the next section, we’ll take a look at some common forms of alternative funding that may be available to you.
Unsecured Loans
An unsecured business loan is higher-risk because it’s not backed by collateral if you default on payment. For this reason, unsecured loans have typically had stringent qualification standards especially concerning credit scores, as well as higher interest rates.
However, there are a growing number of companies that use factors such as your sales performance to decide whether to loan to you. In addition, an increasing amount of lending platforms have a lower than normal (500 or below) or no credit minimum for lending to you.
Many platforms have speedy turnaround times of 48 hours from time of applying and will loan amounts up to around $1000-$250,000, and in rarer instances, $500,000 or more. The requirements for time in business can be as little as 6 weeks on some platforms. Repayment terms can vary from around 3 months to a year.
Interest rates and APR can vary quite a lot so it’s important to shop around. To find out more, visit online comparison websites and resources such as this article from fitsmallbusiness.com.
Asset-Based Lending
An asset-based loan is a loan that you secure using collateral in the form of tangible assets and assets that are on your businesses balance sheets that can be quickly and easily liquidated. Assets can include equipment, inventory, accounts receivable and/or other balance sheet assets.
Asset-based loans are usually taken out when a business cannot show that it can pay for the loan via cash flow. Instead, the loan is granted based on the type and value of the assets pledged. This means that terms and conditions will depend on the type and value of the assets a business offers as security. For this reason, lenders tend to prefer assets that are easy to liquidate.
One great positive about an asset-based loan is that the interest rate tends to be lower than in many other forms of lending because, should a business default on payment the lender has the ability to seize assets and sell them to recoup any losses. Rates tend to vary between 7% and 17%.
The amount you can borrow will depend on the value of your assets, and many asset-based loans have a minimum of $750,000 to $1,000,000 in utilization requirements. In general, businesses can borrow 75% -85% of the value of accounts receivable and 50% of inventory and equipment.
Small Business Administration Loans
The Small Business Administration (SBA) is a US government agency that supports businesses and entrepreneurs. As part of their support, the SBA offer small-business loans that are guaranteed by the federal government. The loans are issued by participating lenders, who are mostly banks.
The benefits of SBA loans is that in general, they have lower rates and fees and some loans come with support to set up and run your business. Down payments tend to be lower and for some loans, there is no need to put up collateral.
To be eligible for an SBA loan you must run a for-profit company that does business in the US and have exhausted all other funding options. These loans are great for younger companies with not as much history in the US.
Loans work via a “match” system, where you enter your details on the SBA website and they then match you with potential lenders. Loan amounts can vary from $500 all the way to $5.5 million. They also offer longer repayment terms in many instances – from 5-7 years for working capital, to 10 years for new equipment purchases and 25 years for real estate purchases.
The downsides to SBA loans is that to qualify you must put up a personal guarantee of at least 20% ownership stake – which puts you and your personal assets at risk for payments if your business can’t make them. You are also expected to provide detailed documentation such as your loan application history and business tax returns, leases and certificates.
Peer-to-Peer Lending
Peer to peer lending (P2P) is a way to borrow money from individuals and investors. People who wish to invest in P2P lending typically join an online network that matches lenders to borrowers. These lending platforms gained traction in the US from 2006 onwards, as the recession began to hit. Since their inception, they have grown in popularity and by 2014, one of the original platforms “LendingClub” reported it had facilitated $4.4 billion in loans in that year alone.
In general, loan rates from P2P networks are competitive, partly because the online-based networks have fewer overheads (such as branch networks and a large workforce). However, it’s still advisable to check rates carefully to see how they compare with other sources of alternative financing.
As P2P lending has grown, those lending money has transformed from individuals to institutional investors. This means it’s become harder to borrow on some of the larger platforms that are home to institutional investors who prefer to lend to those with high credit. However, in recent years, some platforms have focused on lending to people who have a lower credit score and are focusing on rebuilding credit.
If you take out a P2P loan you will need to pay an Origination Fee (a fee you pay to your lender for processing your loan application) which is an upfront fee of typically 1-5% of the loan amount. The application process for P2P lending tends to be fairly swift, with a decision on whether you are likely to get funding given in a short space of time. There can then be an additional wait of a few days as investors decide whether they wish to lend to you or not.
The uses for P2P loans can vary – originally they were intended as personal unsecured loans, for any purpose, but increasingly there are specialized lenders who will lend for businesses. Generally speaking, P2P loans are unsecured. Many larger platforms protect their lenders by covering costs if a loan is defaulted on. This has helped to mitigate being turned down due to risk-averse lenders.
Factoring
Factoring is also known as “Invoice Financing” or “Accounts Receivable Financing.” The financing works by allowing a business to access capital in accounts receivable via invoices that are due to be paid. Rather than waiting for the customer to pay the invoice (which can take 30-90 days or longer), a business can cash in on a percentage of the invoice amount.
To access money from your unpaid invoices, you need to work with a factoring company, which is a third-party financial institution that will offer cash in exchange for ownership of the invoices. This company then goes on to collect the invoice from the customer. You have to pay the company “Factor Fees” which tend to be between 1-5% of the invoice amount.
Factoring is an excellent way to support your business if you are having immediate cash flow issues as it can give you access to cash very quickly. You can also build a relationship with a factoring company and use them on an “as-needs” basis when you need to maintain your cash flow.
Factoring is attractive because there are few restrictions on credit score and loan history when it comes to deciding whether to lend to you because collateral comes in the form of the unpaid invoices. However, the factoring company will be concerned with the payment histories of your customers.
Disadvantages of Factoring include the potentially high fees from each invoice and the risk of becoming liable for invoices that remain unpaid.
Merchant Cash Advances
Merchant Cash Advances are not technically considered to be a loan. Instead, they are a way to access capital quickly in the form of an upfront amount of cash in exchange for a portion of your future sales. Traditionally this has been via credit and debit card sales but has expanded to include upfront cash in exchange for daily or weekly debits from your bank account. This is referred to as ACH (Automated Clearing House) Merchant Cash Advances.
Merchant Cash Advances are structured to be short-term advances and the repayments are taken from 90 days to around a year in either daily or weekly amounts as a percentage of your revenue until the advance has been cleared.
These types of advances typically have very high interest rates – which can be anything from 50% to even 200%, which makes them unattractive for most borrowers. How quickly you can repay the amount will also depend on the receipts you have coming in. If your sales fluctuate it can take much longer than anticipated to pay off the advance. MCA should be treated with caution as they can turn into a debt trap where you must refinance in order to pay them.
If you are considering finding out more about a Merchant Cash Advance it can be worth visiting Nerdwallet’s handy tool for calculating how much an advance is likely to cost you.
Hard Money Loan
A Hard Money Loan is a short-term loan that is secured using collateral in the form of your real estate. Generally speaking, a Hard Money Loan has a term of 1-5 years. Lenders who offer these types of loans tend to be less concerned with your credit history and are funded by private investors or a fund of investors.
The monthly payments for an HML are of the interest of the loan with a balloon payment at the end of the term. Because the money is secured on the real estate collateral, the amount you can borrow will depend on the value of your property.
Advantages to Hard Cash Loans are that they tend to be a quicker process than traditional bank loans and can be more flexible than these types of loans.
Disadvantages are the costs. Rates tend to start at about 7% but are generally 10% and can be even higher if you are deemed high-risk. The short term for repayment should also be taken into consideration before pursuing this type of loan.
Mezzanine Loans
Mezzanine Loans are often described as “hybrid loans” as they combine debt and equity financing. They are usually used for the expansion of an established business rather than for start-ups. These types of loans give lenders the right to convert to a portion of equity in the company in the case of a default on the loan.
Mezzanine Loans tend to be short-term loans of around 1-5 years and because of their extremely high risk to the lender have very high-interest rates – around 20-30%. One of the reasons these types of loans are so high-risk to the lender is that they are both unsecured and subordinated to the payment of other debts (such as senior debt and secured junior debt).
The advantage to a Mezzanine Loan is that it allows the business more control as it dilutes the equity less than other forms of equity financing. This prevents losing outright control over the company and how it will grow. Mezzanine loans also offer a degree of flexibility in agreeing on repayment terms and lenders are often interested in a long-term investment and able to offer strategic assistance to the business.
The disadvantage of this type of loan is the high-interest rate. It can also be a lengthy process – taking upwards of three months or more to arrange and even longer to complete.
Get in Touch With Mount Bonnell Advisors for Support in Securing Non-bank Finance
As you can see, there is a wide range of options available in alternative funding for your US expansion. Each option can have significant advantages and disadvantages depending on your unique situation and business objectives.
For this reason, we highly recommend seeking expert help and advice from experienced advisors who can support you to decide which type of alternative funding is right for you.
At Mount Bonnell Advisors, we’ve been working with businesses expanding to the US for over a decade and have helped a wide range of businesses to secure alternative and non-bank financing for their US adventure. We understand that searching for and choosing funding options can be a stressful process. Incorrect choices can lead to financially unpleasant consequences for you and the future of your business – so it’s important to get the best advice that you can.
We offer support to decide on a strategy to secure financing and advice on how to structure your borrowing effectively. Get in touch with us today to find out more or book a Funding Consultation with us today!
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