Banks are pretty good when it comes to certain things. Need a place to park an unexpected tax refund from good ol’ Uncle Sam? How about a checking account (that you’ll probably never write checks for)? Banks will be glad to step forward. You’ll probably even get a calendar and a fridge magnet. Good times.
But, if you’re at the helm of a startup and need some additional working capital, you’re likely to get the cold shoulder from your bank than a warm handshake — or even a fist bump. Heck, you probably won’t even get a calendar or magnet. What’s the deal?
Well, it’s like this: banks have always been wary of lending to startups; and the bigger the bank, the warier they are. But ever since the Great Recession circa 2008, banks across the board have dramatically dialed back all of their small business lending, and are instead focusing upstream to serve larger, safer and frankly more profitable customers.
Indeed, a fact that banks don’t like to advertise is that it costs them about as much to underwrite and administrate a $100,000 loan as it does a $2 million dollar loan, but the profit on the latter can be many times larger. Since it’s all a numbers game to banks, that means startups and small businesses are on the outside looking in, and big businesses are getting more cash, calendars and fridge magnets than they know what to do with.
Obviously, this is bad news for you and your fellow startup owners, since you can’t wait for banks to see the light and loosen the small business funding taps. You need cash now (actually, you probably needed it yesterday), and so the question is: where can you turn?
Fear not, intrepid startup visionary! You have some interesting and viable options. Here’s a rundown of what might fill the cash gap
1. Working Capital Loans
Working capital loans are provided by firms in the alternative lending marketplace. They work similar to conventional bank loans, except — and this is a big exception — they don’t require collateral, and they’re typically available to borrowers who haven’t been in business for long, or who might have impaired (or just plain bad) credit. While there are a few different kinds of working capital loans, generally they’re a lump sum cash infusion that is paid back in fixed monthly installments. Loans can range from under $10,000 for a few months, to over $1 million for more than a year
2. Merchant Cash Advances
Merchant cash advances are also offered by firms in the alternative lending marketplace. Technically, these aren’t loans — but they work similar to loans, which is why they make the list. Here’s the deal: a merchant cash advance is an advance (hence the name) on future payment card — that is credit and debit card — sales. Each time you ring up a sale, a small portion is earmarked for the lender. At the end of each business day, the numbers are crunched and a transfer is made. The amount is minimal, so as to not disrupt operations and leave you short on cash (we’re talking a few percentage points here). Plus, one of the best things about merchant cash advances is that you’re not on the hook for a larger total cost of borrowing if it takes you longer to pay back the loan.
If your startup is doing something that is both innovative and potentially profitable over the long-term, then crowdfunding might be a viable way to raise funds. If you get some traction, you can leverage the buzz to create even more brand awareness — and ultimately create more sales (or pre-sales) and attract some serious investors with serious money. That’s seriously fun.
The Bottom Line
If banks aren’t interested in helping you steer your startup to the Fortune 100, then don’t lose hope: you have options, and any of the above could help you survive — and thrive!