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As signs of a recession continue to grow, many companies are bracing for the challenges of both a slowing economy and a tightening credit environment. This one-two punch can have particularly devastating effects on small and mid-sized businesses (SMBs) that rely on traditional bank loans and credit lines to fund working capital and other day-to-day business needs.

Rather than risking business disruption due to shrinking credit and cash flow, SMBs can instead use this opportunity to actually expand their access to credit by exploring alternative financing options. Alternative financing provides fast, easy and flexible access to funds that are based on the value of the company’s assets rather than financial performance metrics, making them an ideal resource to augment or even replace traditional funding sources during a down economy.  

In the following article, we’ll look at some of the key ways alternative financing differs from traditional credit options and why they make good business sense for today’s SMBs.

Financing That Keeps Flowing When Credit Shrinks

Traditional bank loans and credit facilities are based on historical performance measures such as cash flow and profitability. Alternative financing solutions however are based on the value of a company’s existing business assets, such as accounts receivable and inventory. This fundamental difference can have a huge impact on availability of funds during an economic downturn.

During a recession, banks typically clamp down on credit availability in order to safeguard their financial health and mitigate losses due to economic uncertainty and declining customer credit quality.  For SMBs, however, this cautionary approach can severely curtail access to critical funds when they need them most.

Consider what happens in a down economy. As business sales and revenue start to slow, many companies will cut expenses to try to keep pace. Inevitably, profitability will start to decline, triggering financial covenants and other penalties that increase borrowing costs and shrink access to funds.

This restricted credit access can compound issues such as delayed customer payments and other liquidity problems, making it harder for SMBs to pay bills or meet payroll, especially during a down economy when many companies try to keep their valued employees on board. Shrinking capital also makes it difficult to invest in needed inventory to support sales, pursue growth opportunities or even make critical equipment upgrades or repairs.

With alternative financing, the impact of a slowing economy is far less immediate or direct.  Because these solutions are based on specific business assets, companies can continue to access funds to support their working capital and growth objectives for as long as those assets maintain value.

Responsive to Changing Financial Needs

This leads to another important difference between traditional loans and alternative financing. Whereas most traditional lenders only review a company’s financials maybe once a month, alternative lenders are far more familiar with the day-to-day business and financing needs of their customers. That’s because they work with customers to continuously monitor asset value and availability, which allows them to stay in lock-step with the evolving capital needs and financial situation of each company.

This close partnership and alignment means that when changes to a customer’s financing needs arise, alternative lenders are already aware of and able to respond to them immediately. Expanding an asset-based credit line, for example, can take as little as 24-48 hours versus 30 days or more for a conventional line of credit.  In some cases, an alternative lender may even proactively recommend new or revised financing options to accommodate changing needs, even before the customer does. 

In fact, alternative financing solutions provide faster, easier access to funds from the start. They require shorter and far less complex approval processes than traditional loans and credit lines, so companies can get the funds they need to quickly replenish diminishing working capital and cash reserves.

Added Flexibility for More Financial Freedom

Alternative financing provides added flexibility for businesses, both in terms of the types of assets that can be leveraged and the different ways funds can be used. Here’s a closer look at three of the most common alternative financing solutions available:

Accounts Receivable (A/R) Financing: Unlocks cash tied up in the company’s accounts receivable to generate immediate liquidity that can be used to meet payroll, inventory and other working capital needs. Terms and availability are based on customers’ ability to pay rather than the borrower’s historical performance. Plus, it removes the burden of having to collect from slow-paying customers or manage additional debt.

Asset-Based Lending: Provides ready access to capital by leveraging a company’s existing inventory or accounts receivable. These loans are typically tailored to specific business needs and the types of assets used, whether that’s a one-time capital infusion or a continuous line of credit. 

Leasing: Allows businesses to leverage existing machinery and equipment to generate immediate liquidity that is amortized over several years through a lease contract or finance new equipment purchases stretching cash outflows over several years. This helps meet immediate working capital needs while maintaining strong cash flow with affordable and predictable lease payments over time.

The Best Results Require the Right Lender

As with any financial solution, achieving the best results with alternative financing depends largely on the quality of the lender. With alternative financing, choosing a lender with proven experience is key. Companies should look for seasoned professionals who take the time to learn about their specific business and cash flow needs while providing clear insight and expertise when it comes to asset valuation and loan structuring. Lenders should provide a dedicated team that understands the borrower’s business and industry, including market and sales fluctuations that can impact current and longer-term financing needs.

Most importantly, companies should choose a lender they trust. The goal is to build a partnership that evolves with the business and financial needs of the borrower, so companies have ready access to the support and financing to build their success in every economic climate and at every stage of business growth.

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