What is the alternative loan? – Small Business Trends
Small businesses and individuals who do not wish to go through traditional banks, be careful. Alternative loans are one way to get the funds you need. Alternative lenders can reduce traditional paperwork.
They provide business financing that is characterized by accessibility, flexibility and speed. Plus, you can get a loan without having to go through traditional channels. All good reasons to keep reading. And learn more about this ideal option for small businesses.
What is the alternative loan?
Alternative lenders focus on business loans which generally have higher interest rates. But there is a benefit, like simplified applications and looser requirements. In addition, faster times to fund these installment loans.
Many alternative lenders usually complete the process digitally. These online lenders use software to provide financing options, get installment loans, and other types of loans early.
The alternative business lending industry in 2022
This type of business financing is real competition for traditional loans. Transactions in this type of rapid financing are expected to reach $344.50 billion this year. It’s worldwide. This comes at a time when traditional bank loans will come with higher interest rates.
Many business owners are looking for alternative lending options as opposed to a conventional financial institution, here’s why.
Why You Should Consider Alternative Small Business Lenders
There’s more than one reason an alternative lender is good for small businesses. Consider the fact that 29% of SMEs short of capital and fail. In other words, cash flow can be a problem.
Here are five reasons SMEs should consider these alternative small business loans.
The application process is fast
An alternative lender uses digital technology for the application process. You can apply for an alternative business loan and receive a response in as little as 24 hours. This is perfect for credit lines of business looking to scale quickly.
Traditional loans involve a longer process. Loan officers take extra time to make sure your business is legit and low risk.
You are in a high risk industry
Alternative loans refer to different types. There are online lenders and private lenders as well as crowdfunding and market lending to consider. Traditional lending institutions make it difficult to obtain financing for high-risk industries. Some examples include the financial industry and construction.
There are more loan options
Alternative online lenders offer different loan options and are processed quickly. These are generally short-term loans that include:
- A business line of credit. Take the money when you need it.
- Equipment financing to purchase materials. Eligibility is determined by value of purchase.
- Invoice financing. Alternative lenders offer loans based on unpaid bills.
There are others to choose from.
Your business has poor credit
Lax restrictions on how you use the money
Alternative business lenders allow you to use the money however you see fit. Basically, inventory and equipment financing might be the exception. A bank loan, on the other hand, often requires a detailed plan.
Best Alternative Loan Options for Small Business Owners
Avoiding a traditional bank loan means finding alternative lending companies. Find one that offers these options for your alternative loan.
1. Cash Advances to Merchants
These are common, but they are more suitable for SMEs that do business by credit card. Obtain the advance and repay it with a percentage of those transactions and a merchant cash advance fee.
2. Invoice financing
Also called invoice factoring. Get money based on unpaid bills. You can get 85% of the value up front and the rest (15%) is paid to you when the bills are paid, less fees. Invoice financing is a quick option.
3. SBA Loans
These are guaranteed by the government. They have low but long term interest rates. This is what the Small Business Administration wants you to know. Your personal credit score will be reviewed as well as your business credit score.
4. A commercial line of credit
These products work that way. Take the money when you need it and pay it back with interest, then these lines of business reset. The lending models of the big banks have them too. But they are more difficult to qualify. The alternative loan process is streamlined.
5. A term loan
Often identical to a traditional version. There are fixed or variable rates and fixed payments. One difference being that there are higher interest rates and shorter terms.
How do alternative lenders work?
These companies provide business loans. When a business does not meet a bank’s minimum annual income standards or when its business credit or minimum personal credit score is not up to scratch.
Alternative loans have more leeway in how they package their products. They take what the bank might consider bad credit. They are faster than banks and credit unions. But that usually means higher rates.
What are examples of alternative business loans?
Interested in this type of small business loan? Here are some examples to consider.
- fintech. You may be able to get lines of credit here. But these alternative financiers only operate online. You will get automated accounting and online payments with Fintech. Kabbage is one of the companies called alternative lenders that can help you.
- Peer-to-peer lending. People lend and borrow from each other.
- Non-profit lenders. Do you have a positive balance with your community? But have you only been in business for a short time? Get lines of credit for less than $50,000.
- A credit union. A good solution if your working capital is low. Installment loans have fixed interest rates.
What low-risk alternatives to cash are available to businesses?
Traditional lenders most often require collateral. Some of the best low-risk alternative options that don’t need collateral include:
Get a lump sum to buy fixed assets like a new building.
Investors come together to pool money. These loans are unsecured.
Lines of credit
Money can be borrowed as and when a small business needs it. Remember, those that are unsecured have higher interest rates.
Image: Envato Elements