Are You Considering Financing Options for Your Small Business? Consider the Alternative.

Contributed by Ed Jay of American Express for Retail Minded. 

Securing the right type of financing is one of the most critical tasks that small-business owners face. While traditional bank loans remain a key source of capital, today small merchants increasingly have a wider array of options to choose from when determining how best to fund their businesses. These alternative options, many of them delivered through online channels, may be a better fit for your business depending on the amount of financing you are seeking, how quickly you need to obtain a loan and how you plan to use the funding once you have received it.

As recently as August 2014, former head of the U.S. Small Business Administration Karen Mills reported for Harvard Business School that small-business lending has still not recovered from the financial crisis, with loan volume down about 20% since the financial crisis. At the same time, Mills reported, loans to larger businesses have risen by about 4% over the same period.

Historically, small merchants have had three main sources of financing: a bank, credit cards, and personal loans. But with credit conditions remaining tight despite an improving U.S. economy, small merchants are increasingly relying on alternative options to fund their daily operations, expand into new markets, and support other activities to ensure their businesses are successful.

In recent years, numerous lenders have come into the marketplace offering small merchants online loan options. These lenders may approve loans faster than a traditional bank and often require less paperwork. They may also offer more attractive terms based on the length of your loan, your personal credit history and other key indicators about your business. In short, alternatives to traditional bank loans can help make accessing capital to run and grow your business a less daunting task.

The following are three factors to consider when evaluating which alternatives may be right for your business:

1. Determine your needs. 

Review the current condition of your business and ask two important questions up front: how long will you need this loan and how quickly can you pay it back? Knowing the answers to these questions can speed up the loan approval process and help you identify the loan option that is best suited for your business. Online lenders and other alternative financing providers may offer access to a range of loan options with customized services. For example, American Express provides Merchant Financing loans ranging from thousands of dollars to as large as $2 million, with monthly and annual loan options. This flexibility is one of the reasons why last year alone American Express provided nearly $1 billion in Merchant Financing loans to merchants.

2. Have a strategy. 

The only thing worse than getting turned down for a loan is getting approved for a loan and not knowing the best way to use it. We’ve seen merchants realize the most success when they have a strategy for how they will use their funding once they are approved. Make a plan in advance so you can execute on the things that will help your business get to the next level. Is your goal to use the financing to buy inventory in bulk to get a better price? Are you taking advantage of a seasonal downturn and financing an upgrade to your business? Or maybe you’re considering making a technology investment or hiring additional employees. 

3. Cash is king. 

Cash flow is constantly top of mind for small and medium-sized shop owners. Unexpected surprises can quickly create a cash crunch for retailers who aren’t prepared. This is where alternative financing can truly make a difference due to its ease and speed.

After an earthquake destroyed his warehouse last August, Max Hunter, President of cabinet and shelving manufacturer Western Dovetail, looked to American Express Merchant Financing to keep his business afloat. By receiving funding quickly, he was able to retain all of the company’s 23 employees, pay off his vendors on time and find a temporary location. Merchant Financing provided the bridge between disaster and recovery so that Max was able to continue operating his family business. Almost a year later, Western Dovetail is back on track with 99% client retention and sales at 90% of where they were before disaster struck.

Obtaining financing will always be a challenge for small merchants. However, the number of loan options available is continuing to grow, and that’s good news for small retailers. 

Contributed by Ed Jay, the Executive Vice President of Merchant Services – Americas at American Express. Learn more about American Express at americanexpress.com.