Finding Financing: Alternatives to Traditional Bank Loans

Finding Financing: Alternatives to Traditional Bank LoansOVER TIME, one of the biggest challenges facing small business owners, including salons, is the ability to borrow money, and that’s only gotten tougher in our current economy. Brad Kime, president of On Deck, a technology platform that connects salons and spas and other small businesses directly to capital, navigates owners through the world of fi nancing alternatives.

ST: Why has it been so challenging traditionally for salons to get financing?

Kime: “Banks have historically faced challenges making loans to salons and other Main Street businesses because it simply takes a lot of time to analyze a business for a relatively small loan (under $250,000). And because it is expensive and time consuming to analyze these businesses, they have defaulted to using tools like the personal credit score of the owner to judge the health of the business. However, the personal payment behavior of the business owner has little to do with predictive capability of a business to repay a loan or understand the health of the business. This unfortunately has prevented millions of creditworthy businesses with strong cash fl ow—but lower personal credit—from accessing the capital they need to grow and expand.”

ST: What are some alternatives to traditional financing from the bank?

Kime: “The good news is there are more and more options available to business owners, largely due to advancements in technology. Below are a few options:

• Social Lending: These types of resources connect borrowers with individuals or groups of people willing to lend at an agreed upon rate. These resources provide a forum for business owners to go online and apply for loans, and then individuals or interested groups can view their credit pro­file, learn about the plans for the money, and if interested, group together with others to fund the request. (Examples: Lending Club, Prosper)

• Matching Services: This resource matches business borrowers with both traditional and alternative lenders. Salons can register with these sites, and your pro­file and lending request will be shown to hundreds of lenders on their system who may be interested in funding your request. The upside: borrowers can get in front of signi­ cant numbers of lenders very quickly, a key bene­fit when expediency is key. (Examples: Lendio, Biz2Credit)

• Short-Term Business Loans: These are true small business loans—not merchant cash advances—that enable you to extend payments over three to 18 months at total costs that are similar or less than long-term financing. These loans are for shorter-term needs that you don’t want to be paying off for years. For example, buying additional inventory before the prom and wedding rush, launching a marketing campaign or simply short-term working capital for your business. Ranging from $5,000 to $150,000, this option may be funded in as fast as one business day.

“ The benefits are threefold: 1. it’s based on your business performance and not just personal credit, 2. it requires information that is readily available from your electronic records (bank account, credit card transactions, etc.), and 3. the term is designed to allow you to spread out the payment, but also have it paid down before your next opportunity surfaces (you don’t want debt stacking up on your business). (Example: On Deck,

• Personal Credit or Assets: With this option, you can establish credit and ease short-term cash ‑ ow issues. While easy to apply, more often than not, most of your business credit will be based on your personal credit. It’s important to note that 1. if you’ve already drawn on your personal credit to build your salon, your score may have been impacted and 2. loan programs based on personal credit are designed for household use, so to upgrade your entire salon may cost $50,000, you might only get $10,000. You could borrow against your home; however, this is a dif­ficult and time-consuming option that poses potential risk to the household.” (Examples: Credit Cards, Home Equity Loans)

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