As we all know, money is the lifeblood of any business and the toy and play industries are no exception. That was why my eyes were drawn to a New York Times article by Ian Mount entitled: “When Banks Won’t Lend, There Are Alternatives, Though Often Expensive.”
The article attests to the increasing difficulty that small businesses are having in securing traditional small business bank loans. The piece, however, helpfully provides some alternatives while pointing out that to the most part, these loans cost more than bank loans. Fortunately, the costs appear to be coming down.
Here are some of the alternatives provided:
Lending Clubs are groups of people who combine assets in order to make loans to small businesses. They are able to assess the loan worthiness of applicant through online platforms. The maximum a company can borrow is $35,000.
Asset based lending takes place when a company sells its receivables to what is called a factor. The company gets most of its money up front from the factor and the rest when the invoice is paid. As an example, let’s say a large retailer gives a manufacturer an order that is very large and for which the manufacturer does not have sufficient funds to produce. By factoring, the manufacturer can get a type of bridge loan that allows it to do so.
What’s the cost? According to the article: “Purchase-order financing costs 4 to 5 percent monthly, while the effective annual interest rate charged by factors is usually 18 to 30 percent…”
This works if a company owns physical assets like equipment or a building. You sell your asset(s) to a lender and then you lease them back. In other words, the company still gets to use the assets; they just no longer own them.
The major cost appears to be the loss of the depreciation for tax purposes; a low ball price for the asset and a monthly lease payment. The Commercial Finance Association provides a Find a Lender service which you can access by clicking here.
There are over 400 nonprofit community development financial institutions which are currently lending to microbusinesses. These are not banks but are sponsored by the United States Treasury as a means of funneling loans to companies that would ordinarily be challenged in finding them. The idea is to help small businesses grow so that more jobs can be created.
Rates run from 8 to 14% on five year loans of up to $50,000. For a list of CDFI lenders click here.
Let us know if you have used or plan to use any of the options.