The Upside of the Sequester: A Boost to Alternative Lending for Small Businesses
With the sequester days away, there is much talk about how government spending cuts will affect the economy. One area of the economy that would be affected by the sequester is commercial lending. Estimated cuts of $902 million to the Small Business Administration loan program would impact thousands of small businesses. Additionally, decreased government spending could lower gross domestic product by $215 billion, shrinking lending levels to those near or below 2008 that may initiate a lending holiday later this year, limiting any hopes for economic recovery.
If SBA loans guarantees are cut, lenders would be hesitant to offer loans to cover short- and medium-term cash flow needs, forcing some borrowers to turn to alternative lenders to fill in the gaps. Alternative lending became more popular in the aftermath of the Great Recession, with financial institutions only recently increasing their commercial lending portfolios.
Alternative lending-such as asset-based lending, allows companies to use their accounts receivable or other assets as collateral to secure a business line of credit. Lenders in this space can utilize software like ours that reviews the business's collateral to make loan decisions and can quickly provide financing for small businesses.
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Yet another alternative lending option is Factoring. Factoring companies purchase businesses' invoices - or accounts receivable - at a discount, providing them instant short-term financing. Additionally for small business retailers, merchant cash advance lenders provide loans in exchange for a share of future credit card sales.
Alternative lending companies like Access Business Finance, Medallion Business Credit, and Summit Financial Resources already exist across the country. Big names have even gotten into the act such as Amazon with its Marketplace site and the American Express Merchant Financing program.
While the interest rates for alternative lending are higher than those of traditional lenders, the flexibility and speed that alternative lending offers allows many small businesses to move forward when the economy falters.
Up until now, alternative lending has had a relatively small presence in the small business lending space, but should the sequester occur, their role and value could dramatically increase.
