Posted by Adam Lindheim
The credit binge and the crash that followed have left entrepreneurs in a bind. Banks, faced with rising defaults, dramatically tightened lending standards to reduce their risk. Small business owners who borrowed liberally when credit was easy were blindsided by the downturn, and many now find their credit scores wrecked. Those with little debt on their books but facing slipping sales are also perceived as risky: They're shut out of traditional loans and even credit cards, and represent a growing market of businesses that banks won't touch.
Enter the alternative finance companies. They include asset-based lenders (which make secured loans for purchases of equipment or inventory), factors (which buy unpaid invoices at a discount), and merchant cash advance providers (which pay up front for the right to collect a share of a retailer's future credit-card sales). These sources of funds generally cost more, sometimes much more, than bank credit. But businesses that survived the recession will need to buy inventory and equipment, expand operations, and hire workers during a recovery—and they are finding few other options to fund their growth.