Whether you’re starting a new venture or looking for extra working capital to expand your existing company, you’ll need to raise investment to drive your small business’ performance, growth, and success.
While the traditional route of funding your business may seem attractive, it’s not always easy to qualify and approve for it. Poor credit history, risky industry, lack of collateral, high debt utilization, poor cash flow, incomplete paperwork, or lack of a solid business plan, there can be numerous reasons for your small business loan rejection. Moreover, the endless documentation and complicated approval process of a bank loan can give a serious headache to a small business owner.
According to Credibly’s SMB Finances and Funding Report 2018, “62.5% of respondents did not seek a traditional bank loan before securing funding through alternative lending.” If you don’t have enough evidence of strong cash flow or you’re an aspiring entrepreneur, then no matter how creative your business ideas and how enthusiastic you are to convert your business dream into reality, you will find it appalling that many traditional lenders may not be interested to offer you a loan for a myriad of reasons.
And, this is the scenario where alternative lending comes into play.
Before you choose the right alternative lender to meet your unique financial needs, you should know some important things about this popular small business financing option. In this blog post, we’ll share all the key aspects that you need to know about alternative financing.
What is Alternative Lending?
In a nutshell – alternative lending or financing or funding for small businesses is any type of financing that occurs outside of traditional lending space. Alternative lending tends to be more flexible than bank loans and often has an easier application process and faster approval time as well. While most traditional banks could take weeks or months to approve your loan application, many alternative lenders can provide capital in as little as 24-48 hours.
Although alternative lenders operate from a physical location, most of these small business lending options are available online – help you seamlessly apply and get funds with just a few clicks on your laptop or smartphone from the comfort of your home or office.
Types of Alternative Lenders
Thanks to Fintech that has significantly changed the funding landscape by utilizing many advanced technologies. These futuristic technologies are helping alternative lenders to gather the data, analyzed the information, identify risks, check creditworthiness, forecast cash flow, and onboard customers. Here are the main types of alternative lenders.
Direct Online Lenders
Direct online lenders or alternative lenders are ones who use their own funds to finance small and medium-sized businesses. The loan application process of these lenders is as quick and convenient as possible. Once approved, you can receive the money into your bank account in a matter of days.
Online Lending Marketplaces
These innovative and intuitive marketplaces help small business owners to find and compare a variety of loan offers from a network of lenders. Unlike alternative lenders, they don’t lend themselves but use a technological platform to connect borrowers with alternative lenders, banks, or investors. With a lending marketplace, you can get a fast and affordable small business loan that best fits your current financial needs and budget.
Peer-to-peer lenders enabled small business owners to secure financing directly through online services that match lenders with borrowers, cutting out the financial institution as the middleman.
Types of Alternative Financing for Small Businesses
Lines of Credit
A line of credit is one of the most versatile loan types for small business owners to solve various cash flow problems. It works similarly to a credit card and is typically easier to get through online lending platforms than from a bank.
In this type of small business financing, the lender provides you with a lump sum of cash that you can repay at any time without a prepayment penalty. The best thing about a line of credit is that you pay interest only on the portion of the capital you use. And once you repay the borrowed amount plus interest, you will have the ability to borrow all the money again.
It is a great funding choice for business owners who are struggling with cash flow in their companies and who want the flexibility to pay for important and emergency expenses throughout the year.
Invoice financing or discounting is an asset-based funding solution that lets small business owners sell their unpaid invoices to an invoice financing company or an alternative lender in exchange for instant cash. Rather than waiting for two or three months for payment, it can give you access to funds almost immediately to improve your cash flow and cover other day-to-day expenses.
The invoices serve as collateral so you won’t have to worry about submitting valuable assets to secure a loan such as real estate, inventory, equipment, or blanket liens.
Invoice Financing is one of the best alternative financing options for small businesses that usually have long invoice cycles and need extra money for funding their daily operations.
Guaranteed and backed by the U.S Small Business Administration, SBA loans help small business owners to secure financing with more flexible payment terms and reasonable interest rates. In an SBA loan, the amount ranges from $30,000 to as high as $5 million.
Whether you’re looking to purchase equipment, pay off debt, invest in real estate, expand business location, or buy inventory, you can use an SBA loan for a variety of business purposes.
SBA loans are the most desirable types of financing options for business owners with amazing credit history who are looking for secure, affordable, and long-term loans.
The process of a term loan is very simple and straightforward. In this type of financing, you are provided with a lump sum of cash that you have to repay over a set period with a fixed or variable rate of interest.
Alternative lenders use technologically advanced platforms to lend money to small businesses that increase flexibility and transparency. It allows you to secure funds and set automatic payments seamlessly.
Term loans might be the perfect funding option for small business owners who need funds to purchase inventory, equipment, or real estate.
Merchant Cash Advance
Last but not least – Merchant Cash Advance is one of the most sought-after small business funding options offered by alternative lenders. With an MCA, alternative lenders provide funds to small businesses that are paid back with a percentage of their daily credit card transactions, plus interest.
A Merchant Cash Advance is a simple and fast way to secure loans for your small business. Moreover, you don’t need to have a perfect credit score or provide any type of collateral when applying for an MCA through alternative lenders.
An MCA is a great funding option for entrepreneurs who need immediate access to working capital to grow their businesses and sustain cash flow temporarily.
Obtaining easy and quick funding for your small business can be anxiety-inducing. The good news is that there are hundreds of alternative lenders who can help you apply and secure a business loan with ease. You can choose one of the above alternative funding options for your small business to take it to the next level. No matter what option you choose, it’s always a smart idea to do your research and be realistic with your ability to repay the borrowed amount.