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All businesses require funds to operate. Maybe when you first opened your doors, you used your own savings or received microloans from family or friends. But as businesses grow, it’s sometimes necessary to obtain outside financing. The majority of business owners usually opt for traditional bank loans or loans from the Small Business Administration (SBA).
In some cases, a startup or small business won’t qualify for traditional financing options. For instance, traditional lenders don’t normally offer short-term, flexible financing. If you’ve found your business in need of capital, alternative lending is a viable option. Alternative financing for small business loans comes in many different forms, meaning it’s much easier to get the money you need for your small business.
Our guide will help you understand alternative lending, the most common types available, the pros and cons of alternative financing and how to apply.
What is alternative financing?
Basically, alternative financing is any type of small business loans or other types of financing from alternative lenders and financing companies outside of traditional banking institutions. Most alternative lenders offer unsecured business loans.
What’s an alternative lender?
An alternative lender is usually an online or private company that provides financing like a traditional bank, but offers a wider range of financing options and typically higher approval rates.
It’s often very difficult to get approved for a traditional bank loan — requirements are stricter, applications are lengthy, and even once approved, it can take some time to see the actual funds. On the other hand, alternative lending options are fast, flexible and quite accessible.
Alternative lending options may have higher rates than a traditional bank or SBA small business loan. Alternative financing also offers flexibility in terms of your credit score, how long you’ve been in business, and how much annual revenue your business brings in.
Additionally, the majority of alternative lenders process applications swiftly.
Why alternative lending options are so crucial in 2021
The year 2020 presented so many unique challenges, for both businesses and lenders. In 2020, lenders welcomed the opportunity to assist businesses hit hard by the COVID-19 pandemic.
Working capital was the top need in 2020, but 2021 presents its own unique set of challenges; that of working capital but also growth capital. As the economy begins to expand from its recent more-than-tight contraction, companies of all sizes must readjust their growth plans and begin to address debts that had been deferred due to the pandemic. Investing in growth post-pandemic is a must, and not all small business owners are ready to meet this challenge without financial assistance.
Advantages and disadvantages of alternative lending
As with any financial vehicle, there are always pros and cons that apply to borrowers differently.
Advantages of alternative lending include:
- Easy application
- Speedy funding
- Plenty of options
Disadvantages of alternative lending include:
- Potentially higher rates
- Shorter repayment terms
- Sometimes smaller loan amounts
It’s important that you evaluate all the pros and cons as applicable to your unique situation and business when preparing to apply for alternative financing.
Instead of a small business loan, look into these alternative lending and financing options
Alternative lending options continue to innovate, and there are new small business loan options regularly. This makes the alternative financing space quite diverse. Some of the more common alternative lending options include small business lines of credit, short-term loans and more.
Typically, short-term loans are scheduled to be repaid within 12 months or less. Most traditional lenders don’t offer short-term options, but they’re quite common with alternative lenders.
Line of credit
An alternative lender may offer a small business line of credit, which is a specific amount from which you can draw. You can use the entire amount or just what you need when you need it. You’ll pay interest on the amounts you use.
Another term for collateral, an asset-based loan is just how it sounds — you offer up an asset to secure the loan amount. If you fail to repay the loan, the lender assumes ownership of the asset. Mortgages are an example of a type of asset-based loan.
Invoice factoring is an alternative financing option in which businesses sell their outstanding receivables to a private, third party, such as an alternative financing company, at around a 10% discount.
In exchange, the business receives around 90 percent of the receivable’s value in one lump sum. The financing company is then responsible for collecting the outstanding payments from the respective payers — the 10 percent discount becomes their potential profits.
Merchant cash advance
A merchant cash advance is not a loan, but a purchase and sales transaction. A merchant cash advance provides the business with upfront cash in exchange for anticipated credit card sales.
The type of alternative financing that’s best for your small business depends on how much money your business needs, when it needs it, and how long is needed to repay the loan. Being a business owner is hard in the best of times, and the pandemic has made operating a business especially difficult. If your business is in need of capital, explore the alternative lending options outlined above.