Breaking Barriers: A Business Owner’s Guide to Overcoming Credit Limits

Kyle Wilson

Last Modified : Mar 12, 2024

In today’s financial market, many small and medium-sized businesses (SMBs) have faced challenges in securing capital to sustain operations and drive growth. With traditional lender’s imposing strict criteria and tightening credit restrictions, SMBs are turning to alternative lenders offering diverse financing options for enhanced flexibility and scalability beyond conventional credit limits.

This guide outlines strategies for SMBs to effectively leverage alternative financing solutions to foster financial growth and resilience. Learn how to maximize access to credit with this business owner’s guide to overcoming credit limits with alternative financing.

How are credit limits determined?

The determination of business credit limits varies depending on the lender’s assessment models.

Traditional lenders, such as banks and institutional investors, typically assess credit limits using the Five Cs of Credit. This model evaluates the following elements to assess the borrower’s likelihood to pay:

• Character: An evaluation of the borrower’s trustworthiness.
• Capacity: The borrower’s ability to repay a loan.
• Capital: The financial strength and resources of the borrower.
• Collateral: Assets used to secure the loan.
• Conditions: External factors, such as the economic and legislative environment, affecting the borrower’s industry. For instance, banks may lower credit limits if a business is in an industry seen as shrinking or risky.

While this credit assessment framework provides a comprehensive evaluation of creditworthiness, it often favors larger enterprises with established credit histories and substantial assets.

Alternative lenders: however, leverage advanced technology to access thousands of credit-related data points and focus more on the quality of the borrowing company’s customer base and assets to determine credit limits.

They also have less stringent lending criteria, and their policies are more flexible and can be tailored to a specific borrower’s business.

Alternative lenders will use some of the following factors to determine credit limits:

• Asset ownership and valuations.
• Business model and growth potential for companies with a clear competitive advantage.
• Your industry and competitive landscape.
• Alternative credit data like vendor payment histories and spending patterns

Reasons for Tightened Bank Credit Limits

Amid concerns of a potential recession during the years following the pandemic, banks became more cautious. As economic uncertainty continues, traditional credit restrictions have intensified due to:

• Increased interest rates by the Federal Reserve impose additional repayment pressure on borrowers.
• The collapse of three major banks in 2023 prompted U.S. banks to conserve capital and maintain liquidity.
• The rising rate of commercial bankruptcies.
• U.S. regulators unveiling sweeping new rules and regulations to further safeguard the banking system against risk.

Can Alternative Lenders Provide Higher Credit Limits?

Alternative lenders often provide higher credit limits compared to banks. By operating within a less regulated environment, they can adopt a more flexible and dynamic approach to credit assessment. This flexibility is typically enhanced by a customer-centric approach focusing on delivering fast funding solutions to access maximum credit. To achieve this goal, alternative lenders leverage their ability to:

• Employ specialized risk models.
• Utilize advanced technology to identify, measure, and mitigate risk.
• Act on specialized knowledge in niche markets or industries.
• Adapt quickly to changing conditions with quick decision-making processes.

Ways to Maximize Business Credit Limits

To maximize business credit limits, start by partnering with an experienced alternative lender – one who is dedicated to your business success. Work closely with your lender to communicate a clear understanding of your business model, market position, and business objectives. The best alternative lenders will leverage this knowledge to help guide strategic decisions and ensure the financial backing needed to meet goals.

To serve as a valuable financial partner, your lender needs the experience to understand the complications of your industry and respond with expertise, command an array of flexible funding solutions, and have deep pockets to meet evolving capital needs.

Let’s take a closer look at each of these lender requirements:

• Experience: One of the best metrics for recognizing a high-value financial provider is experience. Lender experience is crucial in helping businesses achieve maximum access to credit by allowing lenders to assess risks accurately, tailor financing solutions to specific business needs, and leverage industry insights to navigate challenges. Ultimately, lender experience fosters a more favorable lending relationship and provides greater credit availability.
• Diverse financing options: Access to a diversified credit mix enables a business to optimize its financial structure, manage risks effectively, and enhance its overall creditworthiness. By leveraging its strengths across different credit instruments, a business can extract maximum value from its assets and the identified potential of the company.

The following credit mix are examples of the robust financing options provided by the best alternative lenders:

• Asset-based lending (ABL): This financing option offers a secured loan based on the value of your business assets. These assets can include accounts receivables, inventory, machinery and equipment, and real estate. The amount of credit extended is more proportional to the value of the pledged assets than a heavy reliance on the business’s credit score.
• Accounts receivable financing: This powerful financial solution helps businesses covert outstanding invoices into immediate working capital. The best alternative lenders offer high advance rates of up to 95% of invoice values. Invoice financing is an instant remedy for cash flow constraints without incurring debt.
• Payroll funding: Payroll funding is a financial arrangement providing staffing agencies with immediate capital by leveraging its accounts receivable to meet financial obligations. This funding strategy advances funds based on the anticipated income from the company’s outstanding invoices. This allows staffing agencies to ensure timely payment of salaries and other related expenses without waiting for customer payments. Payroll funding is beneficial for agencies that offer extended payment terms to customers, and those experiencing rapid growth, by providing reliable and consistent cash flow.

• Financial Strength. Select a lender with substantial financial resources and a robust foundation to ensure funding scalability. This strategic partnership not only provides immediate funding and ensures the lender’s capability to accommodate your growing financing needs as your business expands.  Collaborating with a financially strong lender cultivates enduring relationships capable of adapting to the evolving financial requirements, contributing to the long-term success and resilience of your business in the market.

Maximizing business credit limits can be a competitive advantage in a tight credit market. Partnering with a high-value alternative lender provides the expertise, resources, and financial strength needed to reach the highest credit limits and access the most capital to support operations and fuel growth.

Conclusion

Credit limits can either hinder or empower SMBs in their financial journey. While traditional lenders may impost constraints, alternative lenders offer financing solutions that are more flexible and provide higher credit limits based on factors like asset ownership, business model, and industry dynamics.

As economic uncertainties and regulatory changes influence the tightening of bank credit limits, SMBs are encouraged to explore alternative financing options for greater access to capital. By partnering with experienced alternative lenders and leveraging diverse funding solutions, SMBs can transcend credit limits and seize opportunities for sustained growth and resilience.

Key Takeaways

• Traditional lenders often pose financial barriers for SBMs with stringent credit limits.
• Alternative financing solutions provides flexibility and higher credit limits, enabling SMBs to overcome limits and maximize access to credit.
• Learn how credit limits are determined, why banks have tightened credit, and how experienced alternative lenders are essential for maximizing business credit limits.

Kyle Wilson

SVP, Sales Director of Business Development for eCapital’s Commercial Finance Division

Kyle Wilson, CPA, CMA is the Senior Vice President, Sales Director of Business Development for the Commercial Finance Division at eCapital. Kyle is responsible for leading business development efforts throughout North America, supporting eCapital’s mission to empower companies by accelerating their access to capital. Kyle ensures the company’s highly skilled team of business development professionals are well-positioned to support market needs.

Kyle has more than 13 years of expertise in commercial financing. Kyle joined eCapital from Hitachi Capital Canada, where he held the position of Director, Business Development. Prior to that, he held business development management positions at Bibby Financial Services (now eCapital), i-Cubed Industry Innovators, BDC and Bank of Montreal. He is instrumental in supporting clients and partners financing requirements while driving our continued growth in the commercial lending space.