The digital age has changed the way we do things. Shopping, food delivery, and even merchants have upped their ante to become successful online. However, this is one side of the coin. On the flip side, we find that businesses struggle to begin and maintain themselves much like offline businesses do.
The primary reason behind this is usually the lack of capital funding. Most banks refuse to risk investing in small businesses for fear that they might fail. It may also happen that merchants might not want to pay the high interest rates and follow the rules of the bank. So how do we bridge this capital gap for small businesses? In come the options for alternative lending for small businesses. Find out why your firm should seriously consider exploring these options in this article.
Alternative Lending: What Is It?
When a borrower does not want to work with a traditional bank to secure a loan, they can turn to alternative lenders instead. Peer-to-peer loans, invoice financing, and crowdfunding are all examples of alternative lending options that may be made available by various financial institutions.
The question then becomes what exactly is alternative lending providing for companies. When looking for business financing, many modern organizations and individuals are bypassing traditional banks in favour of an alternative lender. For the most part, this is because alternative lenders are more willing to work with customers who have less-than-perfect credit, no collateral, or urgent cash needs, albeit usually at a higher interest rate.
When compared to traditional bank financing, alternative lending offers more leeway, is quicker, and has a higher loan acceptance rate. In this day and age, when fintech is sweeping over the world and traditional banks are sometimes struggling to keep up, business owners that are willing to consider non-traditional loan choices have a competitive advantage.
What Are the Non-Traditional Choices of Alternative Lending?
There is a wide range of alternative finance solutions available for small and medium-sized businesses. The most frequent forms of non-bank financing are outlined here.
Lending Method 1: Direct Lending
Direct lending, in its most basic form, is the provision of bank-like loans outside of the traditional banking system. Leveraged loans are funded by direct lenders such as business development organizations who source their funds from investors. Strong yields and steady returns for investors in direct lending funds fuel the market’s expansion and provide access to capital for enterprises that were previously shut out.
Lending Method 2: Venture Debt
If a company doesn’t want to give up shares to investors, venture debt is another alternative to venture capital. Business development organizations, private equity firms, hedge funds, and some banks offer venture capital. This alternate funding option is often used to fund a project or opportunity, like a venture capital investment.
Lending Method 3: Structured Equity Products
There is a wide variety of structured equity options available. Alternative finance providers, such as business development organizations or individual investors, provide these possibilities for small and medium-sized businesses in need of new growth capital. These forms of financing may be more adaptable than traditional bank loans and may not dilute the ownership interest of business owners.
Lending Method 4: Borrowing to Finance Expenses
Alternative lending companies provide a wide variety of debt financing options. For financial support, small and medium-sized enterprises often look to the following sources.
- Cash flow lending by non-banks
- Funding based on Recurring Revenue
- Credit Lines and Home Equity Loans
- Debenture
Lending Method 5: Mezzanine Financing
There is a limit to how much of the company an entrepreneur can give up to investors in exchange for money. Simultaneously, lenders may have limits on the amount of money they are willing to commit, leaving the gap for the business owner to fill. Mezzanine financing provides an attractive means of filling this gap and finalizing the deal.
Lending Method 6: Non-Dilutive Capital
Non-dilutive money, often termed non-intrusive capital, does not require the owner to sell any of the company. Most non-intrusive money sources need payback, and grants may have restrictions that lessen their value.
For younger, smaller R&D-focused companies, the government may fund non-dilutive investment to promote corporate growth.
See Also:
Pros and Cons of Alternative Lending
Direct internet lenders provide small business owners with simplified applications, faster turnaround, more loan options, and fewer restrictions on funding use.
Simpler Implementation
An online application with an alternative lender takes minutes, compared to 30 hours for an SBA loan application. Alternative lenders don’t require years of your company’s financial history like the SBA and conventional banks. These lenders may handle your application with only electronic access to your company’s bank statements.
Faster response
Traditional lender applications and funding might take weeks or months. Due to their streamlined underwriting, alternative lenders can approve and deposit funds in one working day.
Credit Expansion
Alternative lenders offer asset-backed financing and future receivable purchases in addition to lines of credit and collateral loans. Due to their many lending programmes, these institutions may lend as little as $3,000.
Flexibility in Spending
Some lending institutions have strict spending rules. You can put the money where you think it will benefit your business with most alternative lenders. Merchant cash advances and online invoice factoring do not restrict how the money can be utilized, unlike equipment or inventory finance.
The consequences of borrowing money via direct online lenders are also worth noting. Alternative loans for business are easier to get, but the lender takes on more risk. They have higher interest rates, shorter repayment periods, and more frequent payments.
Price Hikes
Due to their lower risk assessment and approval standards, alternative business loans including merchant cash advances, invoice factoring, and other small company funding may have higher rates and fees than traditional lenders.
Less Office Time
Even if the amounts are the same or similar, alternative lending for small business may be available for a shorter duration. Paying off a loan faster will boost your monthly payments, but not your borrowing charges.
Frequent Payments
Your financing may need daily or weekly payments. Merchant cash advances often need a percentage of your company’s daily or weekly credit card sales. To avoid forgetting, payments are often collected automatically. Monthly line of credit or other company capital payments are possible.
Types of alternative lending for small businesses
Alternative lending for small businesses refers to financing options that are outside of traditional banking systems, such as loans from banks. Here are some of the most common types of alternative lending for small businesses:
- Merchant cash advances: This type of financing provides a lump sum of cash in exchange for a portion of future credit card sales.
- Invoice financing: This type of financing allows businesses to receive funding based on outstanding invoices. The lender pays the business a portion of the invoice value upfront, and the remaining balance is paid once the invoice is collected.
- Peer-to-peer lending: This type of lending connects small business borrowers directly with individual lenders through an online platform.
- Online business loans: This type of financing provides businesses with loans from alternative lending companies, often through an online application process.
- Equipment financing: This type of financing provides funds for the purchase of equipment, with the equipment serving as collateral for the loan.
- Crowdfunding: This type of financing involves raising funds from a large number of people, typically through an online platform.
Each type of alternative lending has its own advantages and disadvantages, and it is important for small business owners to carefully consider their options and choose the one that is best suited for their specific needs and financial situation.
Best Alternate Lending Options
Check out the following options and decide what fits your needs. But remember, they’re no EBoostPartners!
- Fora Financial: Their working capital loan lets firms borrow up to $1,400,000 for any legal purpose. Its minimum FICO Score of 500 makes it a top choice for bad credit business financing. However, $12,000 in monthly income is required.
- OnDeck: Offers loans up to $250,000, same-day funding, and early loan repayment incentives. OnDeck customers gain more benefits though it supports just a few sectors.
- Taycor Financial: You can get a loan from Taycor Financial to pay for anything from computers and printers to vehicles and restaurant appliances. You may take your company to new heights with up to $2,000,000 in funding. You have several alternatives for making payments, including deferring them or making them every other year.
- BlueVine: A business line of credit is a revolving line of credit that can be used for working capital or other general business purposes. Bluevine doesn’t charge you anything when you open, manage, or close your credit line. Also, interest is only charged on the amount of money that is actually withdrawn.
Get Funding Now
When compared to the financing alternatives to SBA loans provided by traditional lending institutions, alternative funding provides a number of benefits, including an easier application procedure, quicker processing and approvals, and tailored financing options that meet the specific needs of your business.
So don’t waste your time hesitating. EBoost has your back with safe and sound capital backing. You choose how much you want to borrow and how you want to return it! Call (888) 494-4881 today for a quick consultation.
Alternative Lending FAQ
An example of alternative financing is peer-to-peer (P2P) lending. P2P lending is a type of alternative financing that allows small business owners to receive loans from individual investors instead of traditional banks. In this model, a large number of individual investors pool their funds together to provide a loan to a small business owner. The loan is then repaid with interest over time, with the interest rate determined by the terms agreed upon by the small business owner and the investors.
P2P lending provides small business owners with a faster, more flexible, and potentially more affordable alternative to traditional bank loans. It also offers investors the opportunity to earn higher returns on their investments by lending money directly to small businesses.
Overall, alternative financing options like P2P lending offer small business owners with a range of innovative and flexible financing solutions that can help them meet their financial needs and support their growth and success.
Yes, alternative lenders are generally regulated by the government or financial regulatory bodies in the countries in which they operate. However, the specific regulations and the level of oversight can vary from country to country and from lender to lender. It is important for small business owners to research the regulations and reputations of the alternative lenders they are considering to ensure that they are working with a reputable and trustworthy lender.
Some concerns with alternative loans include:
- Higher interest rates: Alternative loans often have higher interest rates than traditional bank loans, which can make them more expensive in the long run.
- Shorter repayment terms: Alternative loans may have shorter repayment terms than traditional bank loans, which can increase the monthly payment amount.
- Less favorable terms: Alternative loans may have less favorable terms and conditions than traditional bank loans, such as higher fees or less flexibility in loan amounts and repayment schedules.
- Lack of regulation: Alternative lending may be less regulated than traditional banking, which can increase the risk of scams or other fraudulent activities.
- Potential for lower credit scores: Defaulting on an alternative loan can negatively impact a small business owner’s credit score, making it more difficult for them to obtain future financing.
It is important for small business owners to carefully consider these concerns and weigh the potential benefits and risks of alternative lending before making a decision. It may also be helpful to speak with a financial advisor or accountant to determine the best financing options for their specific needs and circumstances.
Alternative lenders are important because they provide small businesses with access to financing options that may not be available through traditional banks. Alternative lenders offer faster, more flexible, and potentially more affordable financing options that can help small businesses meet their financial needs and support their growth and success.
Alternative lenders also offer small businesses with a wider range of financing options, including merchant cash advances, invoice financing, peer-to-peer lending, online business loans, equipment financing, and crowdfunding, among others. This variety of options provides small business owners with the opportunity to choose the financing option that best meets their specific needs and circumstances.
By offering small businesses with access to alternative financing, alternative lenders play a crucial role in supporting the growth and success of small businesses, helping to drive economic growth and create jobs in local communities.
The criteria included in an alternative loan can vary depending on the lender and the specific loan product, but some common criteria include:
- Credit score: Most alternative lenders will consider the borrower’s credit score and credit history when evaluating a loan application.
- Business revenue: Alternative lenders may require proof of business revenue and financial stability, such as tax returns or financial statements.
- Time in business: Some alternative lenders may require the business to have been in operation for a minimum amount of time, typically 6 to 12 months.
- Purpose of loan: Alternative lenders may have specific criteria or requirements for the purpose of the loan, such as the type of business or the specific use of funds.
- Collateral: Some alternative loans may require the borrower to provide collateral, such as equipment or real estate, to secure the loan.
It is important for small business owners to carefully review the specific criteria and requirements of each alternative loan they are considering to determine if they are eligible and if the loan is a good fit for their needs and financial situation.
