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Creativity, Alternative Lenders, And Small Business Financing

“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 name 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.

Any CPA or accountant should be able to explain in detail (so you can understand it) what the reports are telling you. If they can’t or are unwilling to spend the time to make sure you understand, you have the wrong person.

The first thing most small business owners think of when they need capital is a small business loan at their local bank. That’s only one of many options and may not even be the right option depending upon loan purpose. “Most small business owners aren’t merchants,” said Gilbert. “It takes a little more digging to find the right product for most small business borrowers.”


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