This post originally appeared on startupnation.com/start-your-business
Running a business is hard work, and nothing is more challenging than trying to secure the funds needed to start a new business or keep things running smoothly. It has become increasingly difficult for entrepreneurs to get funding from traditional banks, because of the hoops that they make business owners jump through to qualify for loans. So, where can you turn to fundraise outside of traditional banks? Luckily, there are many types of alternative lending to help entrepreneurs get their businesses off the ground or keep them up and running.
Alternative lending or financing is essentially any type of financing that doesn’t come through the traditional banking system. The lenders or funders are typically web-based private companies that offer a line of credit like a bank, or they provide a more traditional loan. Because of the wide range of different options of alternative lending, there is a much higher approval rate and more acceptance of unique situations.
Good candidates for alternative lending
How do you know if your business is a suitable candidate for alternative lending? Well, if you are brand new to the business world or have been deemed “too risky” by more traditional lending options, alternative lending could be the answer you’ve been looking for.
Alternative lending is often much more sympathetic to lower credit scores, lower thresholds for annual revenue and little collateral. Alternative lending is also great for small businesses and medium-sized companies that need an injection of capital to keep going. This means that alternative lending solutions can be great options for second or third rounds of fundraising.
Alternative lenders do, however, still look for some guarantees that their investment will get repaid, so there are financial markers that you have to show to be considered a good candidate for alternative lending. The more profitability and credit history you can, show the more likely you are to be approved for any type of loan, so being able to show lenders these kinds of things will help the process.
All lenders also like to see a relatively clean financial history, meaning no previous tax issues or bankruptcies, though none of these are complete deal breakers if you have other things to show your current stability. Barring any significant profit margins, if you have collateral you can put up against the loan or can convince the lender that you have a very strong business plan that they can believe in, all of these things can make you a more attractive candidate.
Advantages and disadvantages of alternative lending
As with any type of financing, there are advantages and disadvantages to alternative lending. We want to lay out all of the various considerations so that you can make the best determination for you and your business about whether or not alternative lending is right for you.
There are many benefits to using alternative lending, starting with the application process. This is usually much more streamlined and simpler than applying for funding through a traditional bank. This is because you can usually submit all of the materials online and hear back often within 24 hours about whether or not you are approved. Because the application process is easier and everything is web-based, the funds are usually distributed much quicker. So if you need funding immediately, alternative lending is a great way to go.
Alternative lending also generally has a higher rate of approval and is more accepting of newer or smaller businesses, and there are more diverse products to fit the needs of different kinds of businesses. Alternative lending solutions also usually offer more flexible underwriting, meaning that they are more accepting of different financial situations and not as strict about things like credit, income and assets.
While there are many advantages, there are also disadvantages to alternative lending that might not make it ideal for every situation. The first major consideration is that alternative lending options might be more expensive in the long run. This is because these types of loans usually have higher rates or fees than traditional banks. They also typically come with a much shorter-term timeframe, sometimes even as short as one year, and will require more frequent, automatic payments. One other consideration is that you typically can’t get as large a loan from alternative lending financing as you would from a traditional bank.
While these are certain things that you should be aware of going in, alternative lending is still a great option for small business financing, especially if you are struggling to get a loan from a bank.
Types of alternative lending and financing
A term loan is what you generally think of when you think of taking out a loan. It is a lump sum of money that you have a fixed amount of time to repay on a fixed repayment schedule. With alternative lending loans, the payments can be daily, weekly or monthly. This is often ideal for small businesses to help eliminate short-term financial needs.
Line of credit
A line of credit is a more flexible way to get small business financing. It involves getting approved for an overall sum of money that can be drawn on whenever the business needs working capital. It functions much the same as a credit card, with a maximum total amount that businesses can borrow. You are only responsible for repaying that amount that is actually borrowed, regardless of the total amount you were approved for and any additional fees or interest on top of what you borrow. A business line of credit is ideal for businesses that have repeated cash flow needs.
An asset-based loan is a loan that is secured based on any assets that a business holds. These loans usually come with lower interest rates than unsecured loans because lenders view them as less risky. The loan amount is also often determined by the value of whatever asset is being put up as collateral.
Invoice factoring involves a business “selling” its outstanding invoices to a company at a discounted rate. This allows businesses access to those funds quicker than many customers can deliver the balance. Because many payment terms are net-30 to -90 days, this can put businesses at a disadvantage while they wait for the payments that are needed to pay employees or keep the lights on. With invoice financing, they get that money sooner and then pay off the balance of the loan when payments from customers come in.
Merchant cash advance
A merchant cash advance is not a loan but a purchase and sales transaction, which is based on the credit card receivables that a company will expect to receive in the near future. Similar to invoice factoring, it gives businesses access to funds quicker than they would normally have access to them. In return, the purchaser or funder gets a portion of the business’s future revenue receivables.
Secured or unsecured alternative lending options
Alternative lending loans can be secured or unsecured. Secured simply means that the loan borrower backs the loan with collateral. Secured loans are typically deemed as less risky and come with lower payments. The benefit with alternative lending, however, is that you have an option to choose an unsecured loan if you simply do not have any collateral to put up to gain access to a loan.
Examples of a secured alternative lending loan include the asset-backed loan, whereas some line of credits or term loans might be an unsecured business loan. It all depends on what the funder requires in regards to collateral.
How to pick alternative lenders?
Choosing the best alternative lender is based on your individual criteria, but you want to look for a lender that has a wide variety of financing options, a lot of flexibility, and good terms that make sense for your business.
When choosing which alternative lender or funder is best for you, you want to decide in advance what kind of financing you need and look for funders that offer options that align with your needs. You also want to make sure you’re working with a trusted funder with a lot of excellent reviews and positive customer experiences. You also want to make sure that the term of repayment schedule works for your business. A loan should help make your business more successful, not create additional undue stress.
All that’s needed to get started is a bit of information about yourself and your business. While every lender’s application process looks different, there are few things that you will likely need to show to demonstrate that your business is in good standing, such as:
- A driver’s license or some form of ID
- Articles of incorporation
- Financial statements
- Tax returns
- Bank statements
- Voided business checks
- Credit reports
- Proof of collateral
- A business plan
After you submit these documents, the lender will evaluate your application and send you a quote for the amount that they can offer you along with the terms of the financing.
The application process usually takes just a few minutes, because you can submit all of your documents online and many alternative lenders will get back to you within 24 to 48 hours. After the initial application process, your funder will let you know if more information is required.
Key takeaways on alternative lending
Alternative lending is a form of funding that allows businesses of all sizes to get access to needed funds to get their business off the ground. It also allows businesses to continue to growing and operating in an uncertain world shaken by COVID-19.
The post Here’s Why Alternative Lending Can Take Your Business to the Next Level appeared first on StartupNation.