Your Business Credit

New business financing sources to try when the bank says no

While some alternative lenders have slowed lending during the COVID-19 crisis, lending is gradually starting to resume


Some online services offer loans or advances on money your business is likely to receive each month, making it relatively easy to finance big purchases such as holiday inventory. Here are a few great options.

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With bank loans still eluding many small businesses years after the global financial crisis, online services have spied an opportunity to fill the gap in the credit marketplace.

Some offer loans or advances on money your business is likely to receive each month, making it relatively easy to finance big purchases such as holiday inventory. They include Kabbage, PayPal Working Capital and American Express Merchant Financing.

While some such alternative lenders have slowed lending during the COVID-19 crisis, lending is gradually starting to resume.

See related: How to borrow from your business now while you wait for government help

What is factoring, and how do these options differ?

The trend is a twist on the centuries-old financial practice known as factoring. In factoring, you sell your accounts receivable or invoices to a factoring company, which advances you a percentage of the value of the invoices – usually 70% to 90%.

After your client pays the invoice, the factoring company takes out a transaction fee and then sends you the balance. Because of the transaction fees, factoring usually isn’t worthwhile for businesses with lots of small invoices.

These services differ from factoring in that they are not based around a particular invoice. Rather, they look at how much money you historically bring in through a given payment source and advance you cash based on your likely ability to repay.

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Be aware of the borrowing costs

While options like these can help you in a pinch, it’s important to understand how much you’re really paying for the money, says Nat Wasserstein, principal of Hudson Premier Payments, a payments processor in Nyack, New York.

When you consider loans that require you to pay back a small percentage of your receivables every day, week or month, it can be hard to make an apples-to-apples comparison to other forms of alternative financing, such as using a credit card, where the average APR on a business credit card is currently above 14%, or to traditional bank loans, where the average interest rate is about 6%.

The receivables financiers typically charge a set fee based on a number of factors, including your repayment rate. Be sure you understand what that fee is before you sign on.

Also, watch out for a common hazard of loans and advances where sometimes the lender begins extracting payments from your receivables before you even have time to touch the receivables yourself. If your cash flow is already tight, the automatic withdrawals can leave you short of cash to run your day-to-day business.

“It can get to the point that you’re like a hamster on a hamster wheel,” says Wasserstein.

See related: How to conserve your company’s cash during the coronavirus crisis

Small business financing sources: 3 options

Despite these potential downsides, some merchants are finding the new types of receivables financing convenient when they lack other, less expensive options.


Daniel Barnard, vice president of business development and an owner of Scratch Software in Scottsdale, Arizona, uses Kabbage loans during cash flow shortfalls to make payroll at the five-employee firm. He then pays the loans back when big payments come in.

“I thought I would try it out,” says Barnard. “It works fine. It’s easy to draw on.”

Kabbage serves any type of small business, including both online and brick-and-mortar operations. Its lines of credit extend up to $250,000. Loans, which extend for six, 12 and 18 months, come with monthly fees of 1.5% to 10%.

Kabbage is temporarily taking applications for federal Paycheck Protection Program loans being provided to small businesses by the Small Business Administration to help them make payroll during the coronavirus crisis.

Neil Seiden, managing director of Asset Management Solutions in Uniondale, New York, has been assisting small businesses in applying for the loans through Kabbage.

“It’s going very smoothly,” he said on May 1. “Yesterday, a lot of our clients received notice they were approved.”

See related: How to apply for an SBA disaster loan

PayPal Working Capital

Another choice for PayPal users is PayPal Working Capital. It enables qualified merchants to get an advance based on their receivables processed through PayPal from WebBank, a member of the FDIC.

To tap into this funding, merchants must have a PayPal Premier or Business Account for three months or more. They must also process at least $20,000 in annual PayPal sales through a Premier account or at least $15,000 in annual PayPal sales if they have a Business account.

Merchants pay back the loan by giving WebBank a cut of their daily PayPal sales. They choose upfront to make payments of a set percentage of their PayPal receivables, with payments automatically collected from their PayPal account until the loan, plus a fixed fee, is repaid. The repayment plan they choose can have a big impact on the fee size.

The minimum payment, due in each 90-day period the account is open, is 5% of the total payment amount for loans that are slated for repayment in 12 months and 10% of the total payment amount for loans expected to be repaid in less than 12 months, based on the borrower’s account history.

During periods that a business has no sales through PayPal, it pays nothing (as long as the business is not deliberately directing payment volume away from PayPal). Businesses are allowed to repay extra or pay off the loan in full without penalty.

American Express Merchant Financing

For businesses that mostly accept credit cards, another possibility is American Express Merchant Financing, available since 2011.

It enables merchants who accept American Express cards, make at least $50,000 in annual sales and bring in a minimum of $12,000 in annual credit and debit receivables to get small business loans from $5,000 to $2 million for a fee as low as 1.75% for a six-month term.

Amex extracts a percentage of the merchant’s estimated charge volume each month to pay back the advance in the time period of the loan or offers the option to pay it back with a fixed monthly fee.

Amex tailors the terms of the deals to the merchants’ track records in generating cash on Amex cards.

American Express also offers two other products – business loans and Working Capital Terms.

  • The business loans, which range from $3,500 to $75,000, have payment terms of six, 12, 24 and 36 months with fixed APRs of 6.98% to 19.97%.
  • Working capital loans are from $500 to $150,000, with payment terms of 30, 60 or 90 days. There are fixed fees based on repayment terms: 0.6% to 1.75% for 30-day repayment, 1.2% to 3.5% for 60-day terms and 1.8% to 5.25% for 90-day terms.

Don’t rule out other options

Before trying one of these alternative financing options, it’s important not to rule out bank loans and other sources too soon, say experts. One option that many businesses neglect is going to a smaller bank for a traditional loan.

In March 2020, Biz2Credit, a matchmaker between borrowers and lenders, reported that big banks approved 15.4% of loans processed through the site, down from a post-recession high of 28.3% in February 2020, while small banks OK’d 38.9% percent of loans, down from 50.3% in February.

“Look at the small banks no one has ever heard of,” advises CPA Richard Levychin, a partner at Galleros Robinson CPAs.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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