Alternative lending, also known as non-traditional lending, holds a significant place in the financial world, benefiting both small businesses and individuals. It stands apart from traditional bank loans by providing flexible solutions and quicker access to funds. In this article, we’ll dive into the realm of alternative lending and the various business loan terminology that small businesses should know. Let’s dive in!

An Overview of Alternative Business Lending

Alternative business lending, a dynamic financial sector, is witnessing remarkable growth. In 2021, the global alternative lenders market was valued at USD 2.24 billion, and it’s projected to expand at a robust 24.1% CAGR by 2033. This surge is driven by cost reduction, decreased market risk, regulatory sandboxes in developed economies, and the growing need for alternative financing. Small businesses, often struggling to secure traditional business loans from banks, find solace in alternative lending, a trend catalyzed by finance companies and FinTech lenders after the 2008 financial crisis.

The Benefits of Alternative Lending for Small Business Owners

Opting for alternative small business loans over traditional options offers a multitude of advantages. These include quicker access to funds, reduced bureaucracy, and more flexible repayment terms. Business owners also benefit from a higher chance of approval, making alternative lending a valuable avenue for their financial needs. Here’s a closer look at why small businesses may look into alternative business lending:

Quicker Access to Funds:

Many alternative lenders use online platforms, allowing for faster application and approval processes.
Technology-driven evaluations can lead to instant or same-day loan approvals.

Reduced Bureaucracy:

Streamlined application processes mean fewer paperwork and less red tape.
Business owners can spend less time on loan applications and more time on their core operations.

Flexible Repayment Terms:

Alternative lenders often offer a range of repayment options to cater to different business cash flows.
This can include daily, weekly, or monthly repayments and flexible loan durations.

Higher Approval Rates:

With less stringent credit score and small business loan requirements, many businesses stand a better chance with alternative lenders than traditional banks.
Businesses with shorter trading histories or lower revenues may also find approval easier.

Tailored Loan Options:

There’s a wide spectrum of loan products available, from merchant cash advances to equipment financing, ensuring businesses find a perfect fit for their needs.

Support for High-Risk Industries:

Where traditional lenders might shy away, alternative lenders are often more willing to support businesses in sectors considered high-risk.

Build Business Credit:

With regular and timely repayments, businesses can improve their credit scores, making future financing easier.
It can also be one of the only viable option for those looking for loans after bankruptcy or other credit-reducing activities.

Personalized Customer Service:

Many alternative lenders pride themselves on relationship-driven services, offering personalized advice and support.

No Collateral Needed:

Some alternative lending options, like unsecured business loans, don’t require collateral, making it less risky for business owners.

By offering these benefits, alternative lending becomes an invaluable tool for many small business owners, enabling them to secure the funding they need to grow and prosper.

Alternative Lending Options

In today’s diverse financial landscape, alternative lending companies offer a range of flexible solutions for businesses. From equipment financing to crowdfunding loans, each option caters to specific needs, providing a lifeline for enterprises seeking capital.

Equipment Financing Options with Alternative Lenders

Equipment financing through alternative lenders enables businesses to acquire vital assets without substantial upfront costs. This option suits industries like manufacturing and construction, allowing them to stay competitive and efficient.

Merchant Cash Advances

A merchant cash advance is a swift injection of capital, ideal for businesses with irregular revenue streams. By borrowing against future credit card sales, enterprises maintain cash flow stability, ensuring operations run smoothly.

Invoice Financing or Factoring

For businesses grappling with delayed payments, invoice financing offers a lifeline. This option allows them to convert outstanding invoices into immediate cash, providing the liquidity needed to fuel growth.

Working Capital Loans

In lean periods, working capital loans step in as a financial cushion. Tailored for short-term needs, they empower businesses to cover operational expenses and seize opportunities when revenue temporarily dips.

Term Loans from Alternative Lenders

Similar to traditional term loans, an alternative lender may present distinct terms and approval criteria. Understanding these nuances ensures businesses secure the financing that aligns with their unique circumstances.

Lines of Credit

Lines of credit afford businesses the flexibility in managing cash flow. With a pre-approved credit limit, enterprises can draw funds as needed, ensuring they have the resources to seize opportunities and navigate challenges.

Microloans

Startups and smaller enterprises often find their financial footing with microloans. These smaller-scale loans offer a practical capital infusion, enabling businesses to execute essential tasks without taking on excessive debt. These can be among the top small business loans for startups that only need a small infusion of cash to launch.

Crowdfunding Loans

The power of the crowd comes into play with crowdfunding loans. Businesses harness online platforms to secure funding from a multitude of backers, making it a collaborative and innovative financing avenue.

Peer-to-Peer (P2P) Lending

Cutting through traditional banking channels, peer-to-peer lending offers businesses direct access to individual investors. This streamlined approach provides an alternative path to securing essential capital.

SBA Loans for Small Business Owners

SBA loans, backed by the U.S. Small Business Administration, provide a lifeline for entrepreneurs. To qualify for an SBA loan, business owners must meet eligibility criteria such as legal operation, U.S. location, equity investment, good credit, ability to repay, and possibly collateral.

Lending OptionBest Suited ForMethodKey Benefits

Equipment FinancingIndustries needing specific equipmentLending based on equipment need and valueNo substantial upfront costs; Acquire vital assets

Merchant Cash AdvancesBusinesses with irregular revenue streamsBorrowing against future credit card salesSwift capital injection; Maintains cash flow stability

Invoice Financing/FactoringBusinesses with unpaid invoicesConvert outstanding invoices into immediate cashImmediate liquidity; Offset delayed payments

Working Capital LoansCovering short-term operational costsShort-term loans for business operationsBridge financial gaps; Cover expenses in lean periods

Term Loans from Alt. LendersBroad business purposesFixed amount with distinct terms compared to banksFlexible approval criteria; Set repayment structure

Lines of CreditFlexible cash flow managementDraw funds up to a pre-approved limitFlexibility; Only pay interest on drawn amount

MicroloansStartups & small businessesSmaller-scale loansLess debt; Suitable for smaller needs

Crowdfunding LoansInnovative projects & startupsOnline platforms with multiple backersCollaborative financing; Community engagement

Peer-to-Peer (P2P) LendingDirect access to individual investorsConnect borrowers to individual lenders directlyBypass traditional banks; Potentially lower rates

SBA LoansSmall business owners meeting criteriaBacked by U.S. Small Business AdministrationLower interest rates; Extended repayment terms; Enhanced credibility with third parties

Alternative Lender Vs. Traditional Bank Loans

When it comes to financing, small businesses have options. Alternative lenders can be a compelling choice for various reasons. But there are also many small business bank benefits to consider. Let’s explore these advantages:

The Application Process for a Business Loan is Fast

Technology streamlines the application process with alternative lenders, leading to swift responses and timely access to capital.

Business Financing in a High-Risk Industry

Traditional lenders often shy away from business financing in high-risk industries. Alternative lenders step in, providing crucial financial support to businesses in these sectors.

There Are More Options for Business Loans

Alternative online lenders offer a diverse range of loans, from financing equipment to lines of credit, catering to a variety of business needs.

Your Business Has Low Credit

Alternative lenders are more open to working with businesses that have lower credit scores, providing opportunities for growth and stability.

Fewer Restrictions On How You Use The Money

Unlike traditional bank loans, alternative lenders often have fewer restrictions on how businesses can use the funds, allowing for greater flexibility in operations and expansion.

CriteriaAlternative LendingTraditional Bank Loans

Application SpeedTechnology-driven processes leading to fast responses and fund disbursement.Typically slower due to extensive credit checks, paperwork, and approval processes.

High-Risk IndustriesMore open to funding high-risk industries.Often conservative and may avoid financing high-risk sectors.

Variety of Loan OptionsOffers a diverse range of loans, catering to various business needs.Limited range of loan products.

Credit Score FlexibilityMore accommodating to businesses with lower credit scores.Stringent credit score requirements; less flexibility.

Usage RestrictionsFewer restrictions on fund utilization, allowing flexibility in operations and expansion.May impose stricter guidelines on how loan funds are to be used.

FAQs: Alternative Lending

What is the Difference between Credit Unions and Alternative Lending?

Credit unions are member-owned financial cooperatives, while alternative lending involves non-traditional sources like online platforms. Both serve as alternatives to mainstream banks but differ in ownership and lending methods.

How Has Alternative Lending Evolved?

Alternative lending has transformed significantly. Initially, limited to peer-to-peer lending, it now encompasses a broad spectrum of online platforms offering various loan types, making it a dynamic and accessible financing option.

How Does an Alternative Lender Assess a Business Loan Application?

Alternative lenders evaluate applications using a combination of data-driven algorithms and human judgment. Factors like creditworthiness, business performance, and industry risk are considered, allowing for a more holistic assessment compared to traditional banks.

What Types of Businesses Benefit Most From Alternative Financing?

Small and medium-sized enterprises (SMEs) often reap the most benefits from alternative financing. They gain access to quicker, more flexible funding options, which can be critical for growth, especially in industries deemed higher risk.

Is Alternative Lending Better for Small Businesses?

For many small businesses, alternative lending offers distinct advantages. It provides faster approval times, more tailored solutions, and increased flexibility compared to the often rigid processes of traditional banking institutions.

How to Choose the Best Alternative Lender?

Selecting the right lender involves considering factors like loan terms, interest rates, repayment flexibility, and the lender’s track record. Additionally, reading reviews, seeking referrals, and understanding the fine print are crucial steps in making an informed decision.

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This article, “What is Alternative Lending?” was first published on Small Business Trends