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Why Alternative Financing Sometimes Makes Sense for Small Business

NEW YORK (TheStreet) -- Banks have started lending more to small businesses. The purse strings have loosened and banks like Wells Fargo (WFC), U.S. Bankcorp (USB), Citigroup (C), KeyCorp (KEY) and others are committed to increasing their lending by billions of dollars in a few years. The news comes on the back of growing signs that the economy is back on track and the small business credit crisis is a thing of the past.

Banks increasing small-business lending is a cause for celebration, but not every small business owner is dancing with joy. For many, such loans still remain out of reach, and for good reason.

But increased small-business lending is good, but it's not a panacea. In this scenario, a case for alternative financing seems like a stretch at first glance. Dig a little deeper and it starts making sense.

So why isn't small-business lending enough for many businesses?

1. Stringent Regulation

New regulations introduced to eliminate bad lending have boosted lending standards, but lowered the fraction of creditworthy borrowers. Small businesses with little or no credit history have no chance of getting a loan. In such cases, alternative financing options like crowdfunding and business invoice factoring can come to the rescue.

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2. Time

Getting hands on your loan amount quickly is not an option when you take a bank loan. The process is long, arduous and a test of patience. Businesses looking for financing quicker than a traditional bank can provide should not apply for a bank loan. Instead they must look for other options.

3. Second Lines of Credit

Think of a scenario where your business has already taken loan from a bank but it needs a substantial infusion of cash. You have two options in front of you. You can look for another bank loan (which in all likelihood won't be approved). Or you can look for an alternate lender who isn't worried whether you've already taken a loan. No prizes for guessing, but small businesses almost always choose the latter.

What is Alternative Financing?

Alternative financing is financing available outside the traditional banking framework. Some of the popular alternative finance options include:

  • Asset Based Lending: Lenders offer secured loans to businesses for buying equipment or inventory.
  • Factoring: Lenders buy a business's unpaid invoices at a discount.
  • Merchant Cash Advance: Lenders pay upfront to retailers and get a share of their future credit-card sales.

Next up: how to find alternative financing.

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