Alternative lenders provide working capital and other forms of financing for small and medium-sized businesses whose owners need to access funds quickly and/or don’t qualify for more traditional loans from a bank.
As many small business owners know, applying for a bank loan is typically a long, complex process that may not pay off in the end. According to a study by Harvard Business School, “small business borrowers often spend almost 25 hours on paperwork for bank loans and approach multiple banks during the application process. Successful applicants wait weeks or, in some cases, a month or more for the funds to actually be approved and available. Some banks are even refusing to lend to businesses within particular industries (for example, restaurants) or below revenue thresholds of $2 million.”
In comparison, alternative lenders work with businesses that have revenues as low as $5000 a month, and funds are typically available within 72 hours. Business owners don’t need to have perfect credit scores to be approved. And the typical application process takes minutes, not months.
Other advantages of alternative small business funding also include more flexibility, with options – such as equipment loans and invoice factoring - designed to meet the needs of smaller businesses. That said, alternative loans are risker for lenders, which means fees and interest rates are typically higher for borrowers when compared to a traditional bank loan.
Here’s what you need to know about alternative lenders before you sign that contract.
Types of Alternative Lenders
Online: business owners turn to these types of funders to expedite access to fast funding, simplify the loan process, or leverage online lenders more flexible credit history requirements. Online alternative lenders had previously focused on consumer loans, but during the recession of 2008 – and the credit crunch that followed – small businesses have increasingly looked to alternative lenders for funding.
And the alternative loan space continues to grow. A recent report by investment banking firm Morgan Stanley states that “We believe that alternative lending is here to stay. Indeed, we expect its growth trajectory to continue, reflecting the potential benefits of the asset class to both borrowers and investors. Positioning investors at the intersection of technology and finance, alternative lending may provide diversified exposure to a secular shift in the way that consumers and small businesses access capital. their lending to small businesses.”
Peer-to-peer: connects small businesses with funders that include individual investors and institutional investment groups such a hedge fund or investment bank. Depending on the platform, peer-to-peer can provide an excellent way for small businesses with solid credit histories to access funding. They are typically not the right choice for business owners who don’t have great credit. That said, business owners with credit scores in the 600+ range who also meet certain criteria, such as being a veteran, may find interesting offers in the peer-to-peer lending space.
Nonprofit/community based groups: These funders offer loans that meet their mission statement, helping people who may be underserved by traditional business financing to access business funding. They are sometimes referred to as “microlenders” because their loans are typically $50,000 or less. They may also offer free consulting to small business owners, often from retired business executives or financial consultants. Not the best option for business owners who need fast access to funds, but typically a very affordable option for loans.
Types of Alternative Loans
Term Loans: these loans are very predictable; borrowers repay the loan within a set period of time, with a predetermined number of payments with a fixed or variable interest rate. Alternative lenders typically offer short or medium-term loans though long-term loans are available.
Equipment loans: provide funding up to 100% of the value of business equipment owned by a small business, such as computers, vehicles or machinery. The equipment is the collateral for the loan, making this an option that may met the needs of business owners who have substantial equipment assets but will low or no credit ratings.
Invoice Financing/Factoring: it’s not uncommon for small businesses to wait 30-90 days for invoices to be paid. When business is slow, those unpaid invoices can cause significant cash flow problems. An invoice financing loan provides expedited access to funds. There are two options for invoice financing: a factoring loan and a discount loan. With factoring, the lender funds the borrower with a portion of the amount due on invoices. The lender then collects the full invoice amount, plus fees and interest. With invoice discounting, the funder loans the business owner a percentage of the invoice, but the business owner is responsible for collecting the payment, and paying back the loan along with fees and interest.
Merchant Cash Advances (MCA): these are technically advances, as opposed to loans, and are paid back via a percentage of the merchant’s daily or weekly sales. For small businesses that see daily transactions, such as restaurants or shops, this can provide an easy way to access funds quickly. Lenders look at a business’ receipts to determine whether to approve the advance, so small business owners with low credit ratings are often able to get approved for an MCA. It is important to ensure you fully understand the terms for any MCA, as the rates are typically high and terms vary widely.
How to Apply
Requirements vary according to the type of loan, and the amount. One easy way to get started is by getting pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.
One Park Financial works to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.