Small business financing comes in a variety of shapes and sizes. Traditional banks are generally a go-to source of cash for loans and lines of credit, and they undoubtedly have their advantages. If you match their lending criteria, they might offer you reasonable interest rates and large loan amounts.
However, not every small business is eligible for typical business funding. This is where alternative lenders come into play. They’ve grown in popularity in the small company sector, but there are several key differences to be aware of if you want to use them as a resource.
1. Majority Of Alternative Lenders Are Online
Traditional banks frequently have physical sites. This enables prospective borrowers to visit a local branch and speak with a representative in person about the loan application procedure. Alternative lenders are mostly found online and can help with lending in a variety of ways. Some give finance directly, while others connect firms with private investors through peer-to-peer lending platforms. Before agreeing to a loan product, as with any business lender, read the fine print.
2. Alternative Lenders Provide A Wide Range Of Lending Packages
Alternative lenders, like traditional banks, provide a choice of loan options to help small company owners meet their needs. This includes the following:
- Term loans: These are lump-sum loans that firms can employ for a variety of purposes. Online lenders typically give between $5,000 and $500,000. Interest rates and terms might vary greatly.
- Lines of credit: This is a credit line that business owners can use as needed. You will only be charged interest on the amount borrowed. Credit limits typically range from $1,000 to $250,000 or more. Paying down your balance allows you to borrow more money in the future.
- Equipment financing: This sort of financing is suitable for firms that require funds to purchase equipment such as cars, computers, and machines. The actual equipment is utilized as collateral. In most cases, equipment finance provides up to 80% financing. Limits can be up to $1 million or more.
- Invoice factoring: This allows firms to sell unpaid invoices at a discount to a factoring provider. The factoring company then collects money from clients, deducts a fee, and returns the remaining to the business.
- Merchant cash advance: This is an upfront capital source that the company repays with future income. Typically, the lender takes a percentage of future credit card transactions.
3. Credit Score Criteria Are Typically Less Stringent
Traditional banks may have stringent qualifying restrictions, making it difficult for some enterprises to obtain the money they want. This can be especially difficult for young enterprises or proprietors with a short credit history, as they may be perceived as risky borrowers by a bank. Alternative lenders, on the other hand, typically have less stringent credit standards. Some lenders will grant money with a minimum credit score of 500, which FICO regards to be bad. Remember that a lower credit score may result in a higher interest rate.
4. Your Business Time May Not Be An Issue
Small business entrepreneurs may find SBA 7(a) loans, which are backed by the Small Business Administration, appealing. Borrowing limits are frequently high, terms are usually flexible, and interest rates are typically low. The issue is that in order to qualify, borrowers must have been in company for at least two years. This can be a significant issue for entrepreneurs. Alternative lenders can be a feasible choice for startups. Some have no time restrictions for business, while others demand as little as six months.
5. Interest Rates Are Typically Higher
SBA loan interest rates are based on the federal prime rate, which is 8.25% at the time of writing. Lenders then add a spread to the prime rate to calculate the total interest on a loan. Traditional banks’ total interest rates are often lower than those of alternative lenders. In truth, alternative lenders frequently charge rates ranging from 11.00% to 44.00% or higher. Furthermore, not every alternative lender discloses their interest rates and payback terms.
6. You Can Get Funding Rapidly
Alternative lenders generally provide more faster funding than traditional banks, sometimes in a matter of hours. Funding from a traditional bank can take weeks. Alternative lenders can be enticing to small business owners in need of funding rapidly, particularly if they are facing a financial emergency.
How To Maximize The Benefits Of An Alternative Loan
- Reach Out To various lenders: There are no two alternative lenders alike. It pays to evaluate interest rates, fees, payback periods, customer service accessibility, and other factors.
- Know why you require the funds: This entails determining the source of your company’s cash flow problems. Is it related to a seasonal drop in sales or a more serious problem, such as unsustainable production costs? You don’t want a new loan to be a Band-Aid solution to a bigger problem.
- Check to see if you can afford a new loan: Examine the repayment terms carefully to ensure that your company can comfortably absorb a new loan payment. If not, it may result in a difficult-to-manage debt cycle.
- Read the fine print at all times: As previously stated, alternative lenders are not always as forthcoming about interest rates and repayment schedules. Before signing on the dotted line, be sure you have a clear, solid grasp of what you’re getting into.