PHILADELPHIA ( TheStreet) -- Non-traditional finance? How about non-conventional finance? Alternative finance? Alternative to what?
Not only are the phrases tossed around without real definition, but frequently also tinged with an attitude that implies that the financing provided isn't as good as traditional or conventional financing or that people who use the services aren't "as good" either.
Hogwash! The real meaning of non-traditional, alternative and non-conventional is this: The lender is not a bank. As in, not a bank regulated by the federal or state government, the "traditional" regulators. That doesn't mean the other lenders aren't regulated, monitored or ethical. It does mean "Lender beware," but as recent events have proven, even the traditional banks require a higher level of watchfulness than was formerly expected.
Frequently the examples of non-traditional or alternative lending include payday lenders, friends and family, credit cards, perhaps a micro-lender. But these represent sources for smaller amounts of money or capital -- always an interesting list, since many would say that the traditional source of new business financing is friends and family.But there are whole other collections of lenders that fit under the umbrella of non-traditional for larger companies. There are companies that lend money to businesses but are not so easy to characterize even though they are all lumped together under the heading of "asset-based" lenders. Traditional lenders look at a credit rating, the cash flow and the financial results of a business to determine if they are a "worthy borrower." Asset-based lenders might look at the same things but have a different perspective because they are as attracted by the assets of the business as they are in the operations. There may be an asset-based commercial banker who wants only to lend to restaurants that own the building asset in which the restaurant operates. A different asset-based lender is interested in equipment assets and not real estate. The challenge is to find the lender that is a match since they vary so much in their target market. As an example, there may be one lender that lends only up to $2 million and others that lend only more than $2 million. In fact, the challenge is to find the asset-based lender that is willing to lend against the assets an individual company has available to pledge. Other alternatives? There is the hedge fund, the pension plan and the private lender looking to diversify its portfolio by lending to others. There are angel Investors and private equity and venture capital and crowdfunding (sometimes referred to as peer-to-peer) debt. And soon, there will be crowdfunding for equity. The most important takeaways are this:
- Banks are not the only option; they are just one option.
- Understand the business' assets before looking for an asset-based lender.
- There's always another alternative.