What Is Alternative Lending?

If you have a small new startup business, it can be difficult for you as a business owner to get approved for a small business loan. You might need help with moving to a new location or adding more inventory to meet the demand. Fortunately, alternative lending is available for business owners who have difficulty getting approved for a small business loan. Although it is a more expensive way to get a business loan, it is it is an easier way to get capital compared to traditional business loans.

Alternative lending is a lending practice that happens outside a traditional banking institution. Non-banks – financial institutions that do not have a full banking license – also offer different lending options to smaller businesses.

Alternative lenders have lower approval requirements than traditional loans such as less time in business and lower revenue requirements, making them favorable to many new startup businesses. They also have a fast turnaround process as well.

Types of Alternative Lending

Below are the different types of alternative lending. They do not include bank loans or SBA loans. See which one of the options best suits your business needs.

Term loan

You borrow a set amount of money for a set period of time with a term loan. This loan is great for those businesses that have big financial investments.

Line of credit

Lines of credit allow you to use the funds over and over as long as you pay down your balance. It can help you with temporary cash flow shortages or with payroll and bills.

Invoice factoring

If your business has accounts receivable, you can use invoice factoring to get an advance on any of your unpaid invoices and then pay them back when the money comes in.

Merchant cash advance

These are easy and fast to obtain but the rates can be high. Repayments are made on a daily or weekly basis and the lender takes a portion of your sales.

Pros of Alternative Lending

 The following are some of the benefits to alternative lending:

• Easy application process: the process is typically online, and you can have done in just a couple minutes.
• Higher approval rates: you are more likely to get approved by an alternative lender than by a traditional lender.
• Fast funding: alternative lenders get your funds to you in just a few hours and you can start to use the money right away.
• Flexibility: you can use your funds in a variety of ways such as upgrading your office equipment to building renovations.

Cons of Alternative Lending

There are a couple of downsides to alternative lending that are important to note:

• High interest rates: banks offer lower interest rates than alternative lenders. About 3-6% for traditional bank loans and from 10-30% for non-bank loans.
• Short lending terms: terms are around one to five years. With short terms you might have higher monthly payments and could potentially put your business with a shortage of cash flow.
• Frequent repayments: repayment schedules can be weekly or even daily. Bank loans always have monthly repayments.

Applying for Your Loan

When applying for your loan, lenders consider a few factors to determine if they should approve your application or not. The following are the most important:

• Personal credit: lenders will review your credit history, payment history, amounts owed and credit in use.
• Personal debt usage: lenders will want to see how much available credit have that you are not using.
• Business debt usage: lenders will compare your debt to your assets and revenue and see if the debt you have is an appropriate amount for your business.
• Personal debt coverage: personal and business finances are closely related so lenders want to know what you are working with.
• Business debt coverage: your cash flow and debt payments will be evaluated as well.
• Business revenue trend: if your business is determined to grow over time or grow in revenue it is more appealing to the lender.

The Bottom Line

Before applying for alternative loan, make sure you have weighed all of your options carefully and see if it suits your business. You can always speak to an expert who can help you evaluate your financial situation and help guide you in the right direction.