Entrepreneurs Turn to Alternative Finance

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"I think that's going to cause small business constraints with traditional financing." Companies selling goods will have to lean heavily on their suppliers and other nonbank lenders for financing, opening opportunities for firms like Mayer's.

Atlanta-based FTRANS is doing something similar: turning accounts receivable into collateral that banks are comfortable lending against. The company charges businesses between 0.5% and 1% of sales to handle their entire receivables process, from monitoring customers' credit to collecting payments. At the same time, FTRANS partners with banks to provide customers a line of credit, secured by the receivables, so they can access that capital a few days after a sale instead of waiting 30 or 60 days for the customer to pay. FTRANS customers are companies with more than $500,000 in annual sales, including many professional service businesses like law firms or architects that generally don't have hard assets to use as collateral. "Banks use us to get comfortable with a customer that they might not otherwise be able to get comfortable with," says Dan Drechsel, chief executive of FTRANS.

Merchant Cash Advance: Going Mainstream?

For smaller businesses that sell to consumers, merchant cash advance companies offer cash up front in exchange for collecting part of a merchant's future credit-card receivables. For example, a merchant might get $10,000 in cash immediately in exchange for $13,000 in future credit-card sales, collected as a set percentage of each swipe. The idea resembles factoring, but with a crucial difference: Factors advance cash after a sale has taken place but before the seller has been paid, while cash advance providers advance cash on sales that have not yet happened.

Cash advance companies target retailers and restaurants that do lots of credit-card sales and appear risky to banks. "It's extremely high cost of funds," says Jamie Savant, partner at the Strawhacker Group, a consulting company for the payments industry. "It was a vehicle for merchants that could not get traditional lines of credit through a bank."

The merchant cash advance industry wants to become a mainstream funding option for small businesses, rather than a last resort. Some business owners taking out merchant cash advances now have credit scores above 800, says Scott Greist, CEO of American Financial Solutions, a merchant cash advance provider. "You're seeing a lot of businesses who wouldn't have considered it before." David Robertson, publisher of The Nilson Report, a credit-card industry newsletter, predicts more companies will target this market in the next three years because "what was once a relatively small subset of the total is now a chunk of the total."

He also sees other alternative lenders targeting entrepreneurs who can't get bank credit: "There will be companies that look at that high-risk opportunity and say, we can come up with a product" for that market.

Tozzi covers small business for BusinessWeek.com.

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