With 2018 marking the tenth anniversary of America’s economy being crippled by the Great Recession, there’s been a lot of talk this year about the strength and projected health of small businesses. The alternative lending industry, which emerged after the 2008 recession, which forced banks to shut out small businesses that didn’t meet their strict revenue and credit score requirements, has proven to be a key source of working capital for businesses.
After ten years of evolving with the digital age, we can now analyze the alternative lending industry’s impact on small business owners. Hundreds of thousands of businesses have utilized this new source of funding to facilitate growth, but who seems to be benefiting the most from this financial industry?
How Funding Works in 2018
As alternative business funding establishes itself as a trusted source of cash flow, more funding companies are popping up to meet the demands of small business owners in need of working capital. The arrival of more funding companies works in the business owner’s favor as they have more options to choose from and meet the qualifications at.
Each funding company has its own box. In the funding industry, a box refers to the guidelines a company follows when funding a business. Each company looks for certain variables such as monthly and yearly revenue, time in business, negative days, low daily balances. Some businesses are riskier to fund than others, and each funding company has their own box of what they will fund. The majority of funding companies look at top industries in two ways: highest quantity of deals and highest amount funded per deal.
Medical, Manufacturing and Restaurants Lead the Way
Our team at FundKite has found that the most commonly funded industry is medical, encompassing any specialty. Doctors and private practices have daily patients and cash flow. Since frequency of deposits determines risk, industries with a high frequency of deposits are preferred, making medical a top choice. By contrast, a used car salesman does not have steady daily deposits, so there is less of a forecasting probability.
Private practices typically use the extra boost in funds to purchase expensive equipment and high salaries for hiring new employees, as well as other expansions and upgrades that require a sudden influx in revenue. The medical industry is constantly advancing, making the always changing equipment one of the biggest challenges to keep up with as a doctor.
In terms of amount funded per deal, funding companies are finding that manufacturing and retail are their top industries because they see such high volume on a daily basis. Manufacturing in particular has high profit margins, so businesses have the ability to pay back funding without being overleveraged. Stocking inventory and purchasing machinery require large amounts of upfront cash, but they are investments that pay off later. Some companies do both manufacturing and retail, making their needs for working capital reach over $1 million at times.
Many other industries besides medical, manufacturing and retail are using funding to keep their operations running smoothly. Restaurants are a major sector that utilize alternative funding, but because they open and close so easily, some funding companies may consider restaurants to be a better fit for their box by offering even shorter terms or smaller amounts.
Trucking is another common industry that uses funding, but even with companies showing decent dailies, there are typically low profit margins. Low profit margins are made even tighter depending on the economy and international relationships with oil, as higher oil prices make doing business more expensive and push trucking companies to look for extra short term cash flow.
Once a business receives funding, they can turn the money into extra profit in a number of ways. Most common is the purchase of equipment and inventory, repairing broken equipment or trucks, marketing, covering payroll gaps and aiding in expanding locations. Extra working capital is essential to grow a business and therefore the economy, which is why alternative lending is there to help the businesses that the banks can’t or won’t.
Alex Shvarts is the CTO of FundKite, one of the fastest growing Fintech companies in New York that provides funding to small businesses across the U.S.