When your business is in need of some additional financing – whether it's to help pay down debt or fund an expansion – figuring out how much money you need and where to get it can be difficult waters to navigate. As the head of global commercial financing at American Express, the division focused on serving small and midsize businesses' working capital and financing needs, Gina Taylor Cotter has many of those answers.
Cotter is a seasoned lending expert, having headed a number of American Express teams that have overseen various aspects of the company's lending business. We recently had a chance to speak with Cotter about the lending industry and how small businesses can be sure they are taking the right path when seeking financing.
Q: What makes alternative lending an attractive option for small businesses?
A: Alternative lending is a quick way for small businesses to gain access to funds without having to fill out lengthy applications and wait weeks for their funds to be deposited. However, while online lenders often provide digital applications and fast approvals, which larger banks may not be able to offer, these companies can generally only supply small loans and at often high interest rates.
We created our Business Loans product so that our customers can get the best of both worlds – an easy digital experience typically found with online lenders, but with competitive rates and the security and service that American Express is known for.
Q: What should small businesses consider before trying to obtain funding?
A: That question is really best answered by the business itself. It is imperative to know the purpose of the loan and the appropriate type/duration of loan to match the need.
Before anyone considers funding, the first thing they need to make sure of is that they have the ability to repay. If a small business takes out too much funding, especially at high rates, they put themselves in serious risk. Secondly, they also need to determine what exactly they are seeking funding for, so that they are not sitting on the funds for a period of time and paying interest on borrowed money when they don't need to.
At American Express, we take the concept of responsible lending very seriously. We look at our customers' history with us and provide a variety of products at levels of funding that we feel best match their needs. For example, we offer Working Capital Terms for those who could benefit from an accounts payable solution that eases cash flow constraints, and we offer Merchant Financing for those who are looking to make big investments to grow their business or rebuild after a disaster.
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Q: Is it a sign that your business is in trouble if you have to seek outside financing?
A: Not at all. Outside financing is often a critical and extremely helpful way to expand a business, consolidate debt or ease cash flow constraints. Many times, debt financing is the only option to make the necessary investments that a small business needs, when selling equity and using cash reserves are not feasible.
I also want to share some important insights from research we have seen in the market. As much as 74 percent of small businesses have a positive view of the economy, and more than half (57 percent) have plans to make capital investments. So seeking outside financing is not something that is just viewed negatively.
For this reason, we offer a variety of products that are tailored to different needs so that our small business customers can get the funding that they need. Business Loans are our latest addition to this existing suite, and offer a way for businesses to obtain small loan amounts when they need funding for big purchases, growth opportunities or consolidating debt.
Q: How does a business know if it can really afford a loan?
A: That question is best answered by the business itself. It is ultimately their responsibility to know what they need funding for and to have a plan for paying it back.
With our financing products, though, we try to help our customers understand exactly what their loans will cost them and make the process of paying them back as easy as possible. This mostly involves education about different products that are available and what they are for, and being very transparent about the repayment costs and terms.
We do think that we are in an exceptional position to help businesses understand whether or not they can repay their loans, and that is primarily due to our closed-loop model. This model provides extensive information about a customer's history, and allows us to have visibility and access to data across the payment ecosystem.
We also have long-standing relationships with Card Members and Merchants that allow us to develop insights about our customers' spending behaviors and habits. With a deep understanding of the hierarchy of small business financing needs and a long history of serving small business customers, we know our customers and [are] able to be more comfortable with their ability to borrow large amounts of money.
Q: What are some signs that it is time to borrow, and what are some signs that timing isn't right?
A: Again, it comes down to the business and a determination of what they need funding for. If a natural disaster has just destroyed part of their storefront, for example, they may need to borrow money to be able to rebuild. As another example, if they are just breaking even every month, they want to find a way to grow their sales first before taking out a loan to expand.
Q: Are there certain uses that are better to take a loan out for than others?
A: There are many reasons why a small business would want or need to take out a loan, and so it really depends on what their goals are. Accounts payable financing is a great solution for those seasonal businesses who are facing cash flow constraints, while small dollar loans at fixed rates are great for buying more inventory or equipment.
Q: How do you calculate how much you can afford to borrow?
A: On the most basic level, a customer needs to have a good feel for the amount of revenue they have coming in, how steady and expected is that stream of revenue, what their monthly liabilities are, and if they expect any liabilities to increase. Since this is sometimes difficult to predict, we help our customers by collecting data about their spending habits, as well as average revenue they receive, to provide a borrowing amount that best matches what we feel they are comfortable with.