When Lenders Retreat: Alternative Financing Options in a Recession

As the economic climate shifts and businesses prepare for a recession, knowing what alternative financing solutions are available and accessible before they’re needed may mean the difference between weathering an economic downturn or shuttering your doors.

It’s always a good idea for business owners and leaders to have alternative financing options lined up. As the economic climate shifts and businesses prepare for a recession, knowing what alternative financing solutions are available and accessible before they’re needed may mean the difference between weathering an economic downturn or shuttering your doors.

As we explore why bank funding has become increasingly hard to get, we’ll discuss alternative lenders with recession financing that can assist you with payroll and operational costs or even help your business grow.

Bank Collapse: The Forebearer of Lender Retreat

Banks don’t normally hold all the deposits they receive. Instead, they lend and invest a fair sum in order to earn money on the deposits. Silicon Valley Bank (SVB) followed this strategy, too, as NPR reports. It brought in billions by issuing loans to startups and companies that couldn’t get loans from traditional banks, then poured it into ten-year U.S. Government Bonds, which are typically seen as one of the safest investment options. However, they did so before inflation and interest rates climbed, reducing the bonds’ value. As word spread that the bank had made a risky investment and might not have access to funds, customers started pulling their money out in droves. In a single day, $42 billion was pulled out, leaving the bank with a negative $1 billion cash balance. Experts say no bank run of this scale has been seen since the Great Depression. Signature Bank and Credit Suisse faced a similar fate.

Technology is at least partially to blame for bank runs and rapid bank collapses, CNBC reports. Whereas banks of yesterday only had to contend with word-of-mouth panic, today’s banks grapple with the rapid spread of information and misinformation by social media. Moreover, people can digitally withdraw funds at any time. These conditions led to what Mark Williams, professor of finance at Boston University and a former bank examiner for the Federal Reserve, described as a bank run that “no bank, no matter how strong, could ever survive,” per NPR.

Why Lenders Are Tightening Credit Requirements

Lender pullback, also referred to as a “credit crunch,” is the natural reaction to a recessionary market and uncertain economic times by financial institutions. The same was seen during the pandemic, and although funding requests have reached their pre-COVID levels, bank approvals have not yet recovered, according to the latest Small Business Credit Survey.

In these situations, banks begin to prepare for mass withdrawals. As a result, they keep more money on hand and don’t lend as much as they previously did. The few that continue to lend also shift their terms, so it becomes even more difficult to obtain funds, and borrowing becomes much more expensive. For small and mid-sized companies, which are already underserved by traditional banks, it can be a recipe for disaster.

The Benefits of Alternative Financing Options

Businesses today are facing a myriad of unique financial constraints. The cost of everything from raw goods to inventory and wages is skyrocketing. Consumer spending is shifting. Businesses are triaging their own bills and paying invoices slowly. Between banks tightening their credit requirements and outright collapses, non-traditional financing may be the only way some businesses can make ends meet.

Compared to other financing solutions, traditional financing alternatives typically have:

  • Reduced Credit Score Requirements: Whereas banks typically expect a 600 or 650 credit score, alternative financing options are generally less concerned with credit scores. Businesses can sometimes even qualify with bad credit.
  • Less Rigid Qualifications: Banks usually expect a business to be in operation for at least a couple of years and often have other rules relating to revenue, profit, and cash flow. Alternatives typically have reduced requirements.
  • Faster Approval: Because traditional channels require more checks and have more requirements, it usually takes considerably longer to find out if you’ll receive any cash at all. Conversely, you can sometimes find out on the same day if you’re approved when you explore alternative channels.
  • Quicker Cash: It can take weeks or months to get paid when you qualify for a loan, whereas non-traditional financing can put cash in your hands the same day.

How to Get Financing for Your Business Without a Bank

Creative financing is often the key to surviving a recession because traditional business financing channels tend to dry up when they’re needed the most. A few non-traditional funding sources are covered below.

Angel Investors

Angel investors are everyday people who put their own money into a business. Sometimes they do this because they believe in a company’s mission. Other times, they do so because they’re friends or family members of the business owner. They may also do so because they believe the idea will be successful. Investors in the TV show “Shark Tank” fit into this category.

A typical angel investment deal is just under $400,000, per the UNH Center for Venture Research. The terms will vary widely. For instance, friends and family may expect next to nothing in exchange for their cash, while outsiders may expect 30 percent of the company.

Venture Capital

Venture capitalists work in a similar fashion as angel investors. However, their primary goal is usually to make a quick and profitable exit from the company. Venture capitalists will sometimes pool their money together to fund a deal as well. It’s common for venture capital deals to involve giving up board seats too. In this respect, Shark Tank investors can sometimes be venture capitalists too. Businesses that don’t want to give up board seats or decision-making power may prefer venture debt funding instead.

A typical seed investment comes in just below $2 million, while early venture capital investments are around $6 million, per Statista.

SBA Loans and SBA Grants

The U.S. Small Business Administration (SBA) often comes up when discussing financing options. For clarification, the SBA does not provide grants for starting or expanding a business. SBA grants only apply to community organizations that promote entrepreneurship through counseling and training programs, according to the administration.

However, the SBA does guarantee loans made by commercial lenders. The organization agrees to repay 85 percent of a loan if the borrower defaults per the SBA. The intent is to help spur economic growth by encouraging lenders to offer cash to small businesses that might not otherwise qualify. Even still, a fair or good credit score is required, and there are additional expectations like time in business.

Peer-to-Peer (P2P) Lending

Although P2P lending options tend to be geared toward individuals rather than businesses, they may be a viable option for people who don’t mind securing funding in their own name. Terms vary widely because individuals are fronting the cash, but it’s generally easier to obtain funding this way compared to approaching a bank. Businesses will generally pay a bit more in interest and fees but aren’t required to give up any control of the company.

Invoice Factoring

Invoice factoring, offered by alternative lenders like Viva Factoring, provides businesses with a valuable financial assistance solution. By accelerating B2B invoice payments, companies can access immediate cash flow without loans or loss of control. This flexible option optimizes accounts receivable, overcoming cash flow challenges and enabling smooth operations and growth opportunities. With no long-term contracts or minimum volume requirements, invoice factoring is a cost-effective choice for spot financing. Experience improved cash flow and financial stability with Viva Factoring.

Boost Your Cash Flow with Help from Viva

If you’re looking for alternative financing options and think invoice factoring might work for you, Viva Capital can help. Request a complimentary quote to learn more or get started.

Greg DiDonna

About Greg DiDonna

Greg DiDonna, President and Partner of Viva Capital, is responsible for strategic planning and implementation of customer service, and business growth. Three-time award winner of Banker of the Year by Southwestern Business Development Finance Corporation

Comments are closed.