In a small-business guide to alternative finance we have just published, Ian Mount runs down the list of creative alternatives to bank lending. Some have been around forever; others emerged during the crisis. Almost all are substantially more expensive than traditional bank loans, which is why they have been sources of last resort. But as demand for alternative options has increased, some prices have come down.
The guide offers several examples of business owners who arranged alternative financing. One is Dennis Sick, owner of the Mohegan Manor restaurant in Baldwinsville, N.Y., who took a $45,000 advance on credit card receipts last year to cover utilities and taxes during the slow winter months. The lender said that he would take from 13 to 18 percent of Mr. Sick's daily credit card sales until he had received $64,000, which they expected to take from 12 to 15 months, giving him an annual rate between 35 and 40 p ercent. But Mr. Sick ended up paying back the $64,000 in seven months, giving the lender an annual return of  70 percent.
Sometimes owners simply need a cash infusion to survive a rough patch. Obviously, no owner would pay that kind of rate if there were better options. But in general, what does it mean if there are no better options? Is it a symptom of a bigger problem? Too much inventory? Uncollected receivables? Is the new money financing additional losses? At what point do you draw the line between a tough credit market and a business that just isn't working?
