The past few years of recovery from the Great Recession have been difficult times for small business lending, as many small business owners have struggled to get access to credit. Now that the economy is back on its feet, many small business owners are looking to invest in business expansions, and they are looking beyond the traditional banking system to get access to working capital loans.
According to statistics cited in “Why Small Businesses Don’t Want a Loan,” alternative lenders are filling the demand for small business loans: the size of the nonbank financial system has grown to $3.2 trillion, and 3.4 percent of businesses with $5 million or less in revenue attempted to raise financing via an online marketplace lender during the first quarter of 2015.
The rise in alternative lending is coming at a good time for small business owners, since traditional banks appear to be less focused on small business lending. According to a July 2014 working paper from Harvard Business School, “The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game,” small business loans constituted 50 percent of total bank loans in 1995, but only 30 percent in 2012.
Banks often see small business loans as being too risky or not profitable enough; according to the Harvard Business School paper, transaction costs for a bank to process a $100,000 loan are similar to that of a $1 million loan, but with less profit. However, over half of small businesses are seeking loans of $100,000 or less.
With this gap in the market – too many small business owners seeking loans that are no longer appealing enough for most big banks to bother with – alternative lenders have stepped in as a new source of working capital. One of the small businesses that have succeeded in expanding with the help of nonbank small business lending is Houlton Stamp & Coin, a small business in Houlton, Maine that sells collectibles, antiques, and estate sale items from its retail storefront and online.
We talked with Matt Carr, founder of Houlton Stamp & Coin and a Kabbage customer, about how getting access to reliable working capital – without the difficulties of a traditional bank lending process – has helped his business expand in 2015.
Many small businesses find that the process of getting working capital from traditional banks is complicated, stressful, and frustrating. Did you have any prior experience trying to get a bank loan? What about the process was “good” or “bad” or disappointing?
I found the process of applying for a traditional bank loan to be daunting. The bank’s requirement was something in line with three years of records and proven profit. I had my data in place, but most banks struggled with the thought of lending money for purchases of things like antiques and silver or gold. Even though these are all typical inventory expenditures for our business, the bank considered these to be risky.
Alternative lenders have become a growing part of the overall financial system for small business loans. Why did you decide to use an alternative lender to get your working capital loan?
I looked at all the lending sources that were available to me. Kabbage offered a proven track record, good rates, and had a myriad of positive reviews. I called the company’s toll-free line and spoke with a live person, one that told me all the ins and outs. I felt like Kabbage was in the office next door, not thousands of miles away.
What has your working capital loan enabled you to do? Buy more inventory, expand to a new storefront?
I used the funds to purchase gold and silver rounds prior to the holiday season. Although the price of gold and silver fluctuates, many customers like to buy a round or two for the Christmas stockings they fill. Prior to the holidays I borrowed something in the range of $4,000. I’ve also used working capital to expand my business by adding a pawn shop. The pawn business hasn`t made me a millionaire, but it has added some funds to the bottom line. I was able to loan money and purchase pawn slips, signage, and some office equipment through the use of the loan.
Getting the working capital has also allowed us to branch out into some higher-end areas. It’s helped introduce us to new markets, different clients, and allowed us to take a new approach to business. We now seek items regularly for clients, whereas before we purchased what we thought would be appropriate or what would sell, and now we are able to buy on request. We are planning an expansion in 2015 to add another storefront and create more buying opportunities for the folks in our town.
Do you feel like your working capital loan is empowering you to do business differently or “better” than you could before? For example, can you find better antiques to sell, offer more competitive prices for good pawn items, or otherwise do business from a position of greater strength and confidence?
When I started in this business some 15 years ago, I used the extra money I had coming in from my paycheck to obtain new inventory. At that time, I never thought of borrowing to buy more inventory. I grew the business slowly but consistently.
When I applied for a working capital loan, Kabbage looked at my track record, my online sales specifically, and essentially said, “Here, buy more.” This gave me a lot of flexibility, because now I’m able to chase collections that I never thought of chasing, specifically Civil War related antique collections. Many times these will appear, but range from $1,200 to $9,000. I need time and cash flow to purchase a collection of this magnitude. In November, I used Kabbage funding to buy a very nice collection from a Civil War museum exhibit in Iowa. I was able to piece this collection out to specific collectors for a profit. The ability to chase and purchase these collections is truly the key to success in this business.
How has having reliable access to working capital been important for improving the way your business operates – not just for startup costs or one-time capital investments, but for the overall character of how your business runs? Does having reliable working capital help you make better business decisions on a day-to-day basis, and if so, how?
Kabbage has helped my business succeed by allowing me a credit line that waits for me. Unlike a normal bank loan, I can access this money precisely when I need it, and not a moment sooner. Houlton Stamp and Coin started 3 years ago with no capital and a vision. We have worked hard to create a business that thrives on honest evaluation, paying top dollar, and offering excellent antiques. Having the access to funds allows us to find excellent collectible pieces and make business expansions as we see fit, and not feel like we are on a set timeline. I actually do not have a loan out currently, but I check my available capital weekly, just because I like having the security of Kabbage backing my business.
Conclusion: Matt Carr’s story is a great example of how getting access to working capital – even in seemingly “small” amounts that might fly under the radar of traditional banks – is making a significant difference in helping small businesses expand. Working capital not only gives businesses access to infrastructure investments and startup costs; it gives them the confidence to navigate ongoing business operations, make investments in inventory, and capitalize on opportunities as they arise.
With the rise of alternative lending, working capital loans are becoming more adaptable to meet the needs of today’s small businesses. Perhaps we are seeing the emergence of a new kind of small business lending system, where companies can get the money that they need to fund their operations, and alternative lenders can manage the risks and fuel the growth of these businesses in a way that is better suited to the opportunities and realities of the 21st Century small business economy.