SmallBizResource Blog -- Economy

Receivables-Based Credit: An Alternative Financing Option

Posted by Gayle Kesten Monday, Jun 29, 2009, 10:20 AM ET

From increasing interest rates to the need for higher credit scores, many small business owners have felt the strangle known as the credit crunch.

To wit, a whopping 79% of small businesses reported terms of their credit cards have worsened during the past five years, according to the National Small Business Association's 2009 Small Business Credit Card Survey (PDF). But could worsening terms be better than no terms at all? OfficeMax and Advanta recently rescinded their cards altogether. Kirby Newbury, co-owner of DiscountCoffee.com, a 20-employee distributor of coffee, juice, and tea, told Tribune Newspapers he lost more than $40K worth of credit when Advanta cancelled its cards, while freelance writer Donna Stone, who said she relied on her Advanta card to separate her personal and business expenses, is now in search of a "comparable tool."

Earlier this month I ran a half-dozen alternative financing options for startups, in particular, who either had a not-so-great credit standing, or none at all, making it "very difficult for business owners to obtain unsecured working capital." A seventh option for that compilation, though your company can't be brand-brand new: financing through a cash advance.

I spoke to Gary Barzel, director of business development for FastUpFront, who explained that financing through his Passaic, N.J.-based company isn't based on credit scores. Aimed at merchants or any company that accepts credit cards, payback is tied to a percentage of what is sold, meaning if you have a slow sales month, then you'd repay less than if you had a good month.

"Traditionally, as sales go down, it becomes hard to repay a loan because the payments are fixed," Barzel said. "With FastUpFront, as sales are made, we get paid back."

That could provide some much-needed breathing room for small-business owners, 52% of whom reported customers are making payments more slowly than in the past, according to the just-released Intuit Payroll Survey (PDF). (By the way, tomorrow, June 30, Intuit is hosting a virtual town hall meeting on Twitter, highlighting ways small businesses can obtain credit. Details are here.)

Of course, every type of financing has its price -- in this case, an interest rate of 30% is about average, Barzel said. (For comparison purposes, one-fifth of the small-business owners who participated in the NSBA survey reported paying an interest rate in excess of 20% on their primary credit cards.) And not every small business that walks through FastUpFront's virtual doors qualifies either. Home-based businesses, viewed as less viable as those that have a "real" business location, will be turned down, and so will companies in operation less than three months and/or with less than $5K in credit-card processing.

"You don't need a long business history, but you have to prove a recent history," Barzel said.

Is this an option you'd consider?

Economy