Alternative lending refers back to the practice of lending money or providing an advance outside of traditional means such as a bank. Typically, the entire process of alternative lending takes place on the internet and over the phone.
How did Alternative Lending Begin?
In the early 2000s, if your business owner needed money to expand their company or obtain capital, their options were very limited. It had been either apply for a business loan with a bank, or fund their business using personal resources, like a second mortgage around the house.
After the latest financial crisis of 2007 – 2008 began to blow over, and business owners began to look towards making their business profitable again, a significant funding problem became evident. Banks weren't any longer as wanting to help business people, and poor credit ratings resulting from the recession limited a business’s funding choices.
Seeing there was a heightened need for funding options for businesses, numerous alternative options were created by lenders. These options focus more about the company and its vision and profitability instead of around the owner’s credit score, affording her or him the opportunity to build their business without having to feel the long drawn out bank loan process simply to be rejected in the end.
Common Misconceptions Regarding Alternative Lenders
There are a few common misconceptions with regards to alternative lending. If you purchase into this, you may be passing up on a funding opportunity which could become a costly mistake. Listed here are three of the very most common misconceptions:
1 – Alternative Lending is a Greater risk than Traditional Financing
False. The truth is alternative lending might be less risky for any business owner since most of the funding choices are unsecured. Meaning you don’t need to put up any collateral as part of your agreement.
Conversely, a traditional bank will require some form of collateral for you to be also considered for a loan.
2 – Alternative Lending Have Higher APR’s Than Traditional Financing
Again, this is a common misconception. Alternative lenders have multiple funding options, and yes, some of those options have a higher APR or payback cost than a bank, but other available choices is going to be comparable.
One such product that includes a higher payback is really a Merchant Cash Advance (MCA) or Working Capital Advance. This funding choice is not technically financing but an advance of future receivables. But other options, like an SBA Working Capital Loan or Equipment Financing might be similar to a bank.
3 – Alternative Funding is ONLY for Business people with Bad Credit
While it’s true that alternative lenders have funding options that you might be eligible for if your personal credit rating isn't good, it’s not the only funding available. If your credit rating is bad, your options will be limited. If fact, any score under 600 may limit your options for an MCA or Capital Advance. However, if you have excellent credit score as well as your other business qualifying factors are great, you might have multiple funding possibilities for you.
Most business people who have a great credit score typically decide upon an alternative lender rather than a bank for several reasons, most of which incorporate a quicker process and less paperwork.
Qualification Factors with Alternative Lenders
Alternative lenders look beyond a business owner’s credit rating and think about the stability from the business by looking at factors like its daily transactions, revenue and growth potential. This provides an entrepreneur that has flawed personal credit the chance to still build their business with the aid of financing or advance.
Types of Funding Options with Alternative Lender
Even large successful businesses rely on working capital business loans to assist cover costs, purchase inventory, expand operations, make payroll, and more.
When considering the various funding options an alternate lender offers, make sure that you completely understand the terms and rates that accompany them. Not every options are the best fit for every business type.
Also, the funding possibilities may vary by alternative lender. Here are the most common types:
Line of Credit
With a business type of credit, you receive approved for a specific amount of capital. You're then in a position to withdraw, or borrow, from that approved funding when you need the cash and you will only need to pay interest on the amount that is withdrawn.
Many business owners find this kind of financing advantageous as it supplies a lot of flexibility, because you only withdraw the thing you need, when it's needed. Plus, the terms are structured having a fixed APR with monthly obligations.
SBA Loan
An SBA loan is a kind of funding provided by a lender but is guaranteed through the Sba. This guarantee helps in reducing the danger for the lender thus making it simpler for smaller businesses to get a loan.
There are several kinds of SBA loans, each with there own set of requirements. Small company Funding, for instance, offers an SBA Capital Loan where you can get approval up to $350k.
Many business owners find this kind of financing advantageous as it’s a minimal interest funding option.
Equipment Financing
Equipment financing is simply that, a lender provides you financing to buy a business-related piece of equipment. The terms are usually a fixed APR with monthly obligations. The purchased equipment will is than used as collateral from the loan.
Many business owners find this kind of financing advantageous because the terms are reasonable and they are capable of getting the required device without any cash out of pocket.
Invoice Financing
Invoice financing is when a lender provides you funding, generally up to 90% of the unpaid or pending invoice. The entire invoice from your customer is paid to the lender.
Many business people find this kind of financing advantageous given that they receive cash in hand earlier compared to when the invoice would really be paid.
Term Loan
A term loan is similar to a traditional financial loan in which you possess a fixed Apr (APR) with monthly payments. The real difference from a term loan from an alternative lender along with a traditional financial loan comes down to the requirements. Typically, an alternative lender might have lower requirements with regards to factors for example annual revenue, amount of time in business, and credit rating. This may lead to a slightly higher APR compared to a bank.
Many business owners find this kind of financing advantageous as it’s structured just like a traditional loan by having an APR and monthly payments and, generally, will receive funding quicker than the usual bank.
Invoice Factoring
Not all of your business’ sales are going to be paid as soon as the product is delivered or even the service is completed. If unpaid invoices are hurting your money flow, then invoice factoring is worth looking at when thinking about getting capital loans.
Rather than taking on another loan debt, you “sell” those unpaid invoices to a different lender. This essentially gives you the money you would have if the bills were paid promptly, minus a charge for the service. As long as this fee does not exceed your profit margin on the invoices, you are not losing any of your business equity, just a percentage of your profit.
Business Cash Advance
There really are a couple various kinds of business payday loans, just like a merchant cash loan or working capital advance. They're similar in that, you're provided lump-sum of money (funding) in return for an agreed upon payback or percentage of daily sales. The repayments are made either daily or weekly via a business’ merchant processor or using a daily ACH debit from you company banking account.
Many business people find this type of financing advantageous should they have difficulty getting funding due to a bad credit score or require a large sum of money quickly.
When a Business Cash loan Makes Sense
A Business Cash loan looks at the likelihood of future sales and takes its payments from them and is associated with alternative lending. But when performs this kind of funding make sense to some business proprietor?
This is more of a cash loan than the usual loan, as there is no written contract defining terms for when the money lent must be paid back as well as for just how much. Instead, you and the merchant reach a contract as to the number of your credit card sales they'll deduct daily towards repaying the advance. A fee is added to your balance and turns into a part of the money that you must pay back. The company owner is really “selling” future revenues at a cost so he/she may use those future revenues today.
There isn't any debt because this is not a loan, but as the company owner you're responsible to repay the lender as they paid for those future revenues. There aren't any collateral requirements whatsoever which can make this an enticing option.
Take into consideration the same factors you would for factoring before committing to a merchant cash advance. Is the amount you have to pay like a fee more than your profit margin? Also, will deduction in revenue out of your future receivables make you not able to meet your company needs? If you are able to sort out terms where neither of these points are an issue, then you're not creating a cycle of dependency by using this alternative loan solution.
Merchant Cash Advances can be paid via your daily credit card receivables or like a daily payment directly from your company account. The latter is called a revenue-based business advance or revenue based capital advance. Either method is still considered a “purchase” of future revenues and isn't financing.
Why Alternative Lending Instead of a Traditional Bank
There are a number of factors which have renedered it very hard for smaller businesses to get capital and other types of loans. For just one, they simply don’t possess the kind of collateral that a lot of lenders are actually requiring to support business loans. They also don’t also have the luxury of your time to hold back for approval as the bank lender demands a countless quantity of documents before even looking through the application.
Then you have the issue of credit scores. Banks are still wary about extending loans to anybody who doesn't have an outstanding credit rating dating back years. This requirement is very hard for most business owners to satisfy, making them need to look elsewhere to assist solve their business financing problems.
It takes years to repair a bad credit history. For them, alternative lenders provide a way to continue building their business, despite any blemishes on their credit report.
What to consider By having an Alternative Business Lender
Quick and simple isn't the only aspect to search for when looking for an alternate business lender. Although that helps, additionally you want an alternative business lender that:
Understands Your particular Industry Needs
Traditional loans from banks are of the standard variety, where one dimensions are designed to fit any company structure. With alternative lenders they should be wanting to enable you to look for a lending product that is designed for your industry.
For example, if you're a large manufacturer who uses expensive machinery, a good alternative business lender will be able to demonstrate how by using their machinery as collateral can help you to have a business loan with better terms than other products.
The lender you select ought to be willing to work with you and assist in finding the loan product which will provide your company with the most benefits.
Provides Clear to see Terms
Loan terms aren't always cut and dry, and if you don’t know very well what the repayment requirements are, you can wind up paying much more for a loan than it is worth. Worse, you may find yourself in a position where repaying your loan is hurting your business.
Find a business that is not afraid to show you exactly the same kind of details you'd find in a truth in lending document. This outlines all of the costs for you, as well as the total amount you'll have taken care of the loan once it's been paid back entirely.
Gives You Multiple Loan Options
Not watch has got the same needs, there are different kinds of loans open to suit different business structures and goals. An alternative lender of merit will be able to provide you with choices, and details that ones are appropriate for different circumstances.
For example, while an internet business having a high number of credit sales may need a merchant cash advance, an alternative lender will be able to offer a substitute to the small coffee shop owner whose daily sales are almost entirely made in cash.
If you cope with an alternative lender who is only offering one or two kinds of business financing solutions, you could get a loan that doesn’t help you to move your company forward.
Has Terms You Can Work With
Most importantly, you need to find an alternative business lender who gives you loan terms that won't harm your business.
Going to the merchant cash advance for example, if your clients are making almost 100% of its sales through credit, you may not have the ability to afford to pay back the borrowed funds while using majority of that money. Otherwise, it's easy to discover that you are once more lacking in working capital to maintain your business running. Terms should be flexible to satisfy your particular business structure and needs if an alternative lender will probably be of value to you.
Has a Speedy Approval Process
Small business people typically seek a loan simply because they need cash today, not a month or two from now. Look at the kind of documentation needed and average wait time it takes before you decide to have the cash at hand.
Already has generated a Good Reputation
You are in your rights to check on in to the background of the lender to ascertain if you will find any complaints lodged against them or questions regarding their integrity. This kind of business is popping up all over the place, and every new company is not always likely to be a reputable one. Research your options first to guarantee that you're dealing with a loan company of good standing.
Should you go with an Alternative Lender?
An alternative lender is really a logical option for any business owner looking for funding. As long as you study the terms carefully and be sure that the business goals and earnings are not being impacted, funding from an alternative lender will do what it really is meant to, provide you with the money you'll need today, to guarantee that you're still running a business tomorrow.
Many smaller businesses have the cash to keep up with daily costs, but it is tangled up within their inventory or unpaid invoices. Getting working capital business loans helps to liquidate that money within days, so the business can continue to grow and prosper.
If you've any queries or want to make an application for funding, you are able to call 800-742-2995 or complete the business funding request form.