Imagine one of your clients, a local pharmacy, needs extra cash to buy inventory. As the cost of medicine has gone up, they’ve started buying in bulk to save money.
But to buy in bulk, they need short-term cash. The owner turns to you for insight on a fast and convenient option to raise working capital.
Do you know their options?
As trusted ProAdvisors, you often are the first people small business owners turn to with questions about how to get cash for a new opportunity or to cover a cash flow gap. You might even identify a cash flow gap before your client does.
In the absence of available and convenient bank funding, small business owners may consider taking a cash advance against their business credit card. But, this can diminish the value of the card for regular business purchases while incurring high fees.
To best advise their clients, accountants should know these seven things about a relatively new source of short-term working capital: Alternative Lending.
No. 1 – Expect faster response times and less paperwork than banks
By leveraging advanced data and analytics behind the scenes, Alternative Lenders quickly evaluate a business’s credit risk without a lengthy application. They often can provide funding within 24-48 hours. The more technically advanced Alternative Lenders typically require less documentation and can often start processing an application with a business owner’s full name, business name, business revenue, Social Security number and tax ID number.
As trusted ProAdvisors, you often are the first people small business owners turn to with questions about how to get cash for a new opportunity or to cover a cash flow gap.
No. 2 – Comparing your funding options is not always apples to apples
One way that accountants can help their clients understand the price of short-term capital is to understand basic agreement terms. Accountants can help small business owners compare different options by considering the total pay back amount as well as the frequency and amount of payments.
Basic agreement terms, include:
- Funding – Working capital funding means the total dollars your client will receive.
- Estimated term – The expected length of time your client will make payments.
- Cost of funds – Money paid for the use of money. Different types of agreements calculate this in different ways.
- Fees – Money paid for a service. Providers of short-term working capital might charge a one-time, upfront fee.
- Payment amount and frequency – Short-term working capital payments often are made weekly.
Accountants and small business owners should insist on upfront, transparent pricing. Alternative Lenders should make it easy to understand the payment amount, frequency and the total cost your client will pay for working capital funding.
No. 3 – There’s more to the cost than Annual Percentage Rate (APR)
When considering the cost of working capital, small business owners with mortgages, auto loans, and other long-term consumer lending agreements will often ask about APR because they are accustomed to using APR to compare financing agreements.
APR was developed to help consumers compare when loan pricing is calculated using interest rates and fees. APR annualizes the cost of borrowing funds over a financing term such as three years. APR is most useful when comparing loans of the same term. Make sure that your clients understand that APR alone does not give the full story of costs for term agreements under a year.
No. 4 – Avoid commission-driven brokers
Small business owners should avoid using small business funding brokers. Brokers work on commission and are motivated to push the most expensive funding available instead of the most affordable. Your small business client could easily end up with funding that isn’t a good fit for their business.
No. 5 – Online applications are convenient, but if you have questions, there should be people available to answer them
The best Alternative Lenders offer a clear, easy-to-use, online interface, with access to real, live experts. While an online application process allows business owners the opportunity to conduct their own research and apply for funding at their convenience, many small business owners benefit from talking to an expert to help determine the funding and terms that make the most sense.
No. 6 – Perfect personal credit is not required
If your client doesn’t have perfect personal credit, they still may be able to access short-term working capital. While banks may look only at a small business owner’s personal and business credit, Alternative Lenders also look at the cash flow and overall health of a business. Some even take online reviews and other business health indicators into consideration.
No. 7 – Look for real people reviewing and evaluating applications
As accountants know, every small business has unique circumstances and unique needs. No one formula works for every type of business. Having real people evaluate working capital requests gives your clients a fair shot at securing the business funding they need. Alternative Lenders that use teams of underwriters can offer a personal touch that an algorithm alone can’t take into consideration.
Applying for short-term working capital from an Alternative Lender can be the difference between being able to pursue a new opportunity or bridge a cash flow gap and suffering a serious setback.
Small business owners overwhelmed by the number of options and questions about the process, with guidance from their accountant, can get the cash when they need it at a price they can afford. With a better understanding of what to look for and what to avoid, you can help advise small business owners which Alternative Lending solution is a good fit for their business.
Jay Lee Swift Financial
Jay Lee is the Chief Marketing and Product Officer at Swift Financial, a leading direct provider of working capital solutions exclusively to small businesses. For more than 20 years, Jay has been focused on marketing and technology in the lending, payments and loyalty industry. He has held senior executive positions in strategy and marketing at Aimia, American Express, GE Capital and FleetBoston Financial.