Reasons You Should Consider Alternative Lenders to Get a Business Loan

People aren’t often fond of financing and banks, especially when banks come with exceptionally impossible barriers to breakthrough when it comes to applying for a business loan. For that reason alone, as a start-up, a small business owner, or someone with a poor credit score, you should consider alternative lenders in financing to get a business loan.

There are various and numerous types of alternative lending options available if you know where to look. Alternative financing is completely legal and is a reasonably faster way for businesses to gain access to loans when required for business purposes. Keep reading below to find out why you should consider alternative lending opportunities and how they can benefit your business solutions.

What is Alternative Lending?

Alternative Small Business Funding

Alternative lending, or alternative finance, is the means of seeking a loan without going through a conventional banking institution. Alternative financing can refer to any type of loan that does not involve a traditional bank.

An alternative lender is a person who has the means to provide you, or your business, with the alternative financial option of a loan through the operation of a private business or through the pure will to assist where it’s needed. For example, alternative lending can also refer to borrowing money from family and friends.

These financial loans can be granted on behalf of the lender if they, much like a banker, have approved the applicant for a repayment rate and have obtained all the necessary written documentation, contracts, and proof of identification.

Alternative financing has increasingly become more popular since the financial crisis recession in 2008. It was a difficult time for businesses and individuals to get loans approved so they started seeking alternate means of financial solutions.

Types of Alternative Lending

As mentioned above, there are various and numerous types of alternative lending options available depending on the necessities of your business.

Non-traditional alternative lending options are a good way to avoid applying for loans through a bank and facing what many before you have faced, rejection. These non-traditional ways of financing your business provide you with more choices than just the bank.

Some of the main sources of alternative financing are:

Peer-to-peer (P2P) lending

P2P lending allows individual investors to work with businesses looking for help financially. Investors have the choice of which companies they want to work with and as such will choose investments that they believe will result in profit for both the business and themselves.

Investors and borrowers sign up to online platforms (P2P platforms) where borrowers have submitted an application outlining their need for a loan and why and the P2P system matches them with likely investors.

Unlike a traditional bank, the individual investor may have a say in how the business will be run and may also essentially part-own the business if this is agreed to by the applicant.

P2P has been the leading driver of alternative finance across America because of its straightforward system, its quick turnaround model, and attractive rates for all parties.

Take a look here if you want to learn more about the P2P process and how it works.

Crowdfunding

Crowdfunding refers to raising funds for a purpose.

Small businesses, entrepreneurs, and start-ups tend to use crowdfunding options to raise money for their projects to get them started, or to get them off the ground running.

Crowdfunding platforms are online and can reach a wide audience if marketed and shared amongst numerous people who are willing to try and help raise the funds needed for the business venture. Crowdfunding offers the huge benefit of having a much wider reach than other types of alternative finance.

Crowdfunding typically works by receiving a collective of small funds from many individuals. It can be friends, family, or random people that see something worthy in your cause.

There are three primary types of crowdfunding options, donation-based, equity crowdfunding, and rewards-based. People that contribute to your application can be investors or donators depending on the type of crowdfunding.

If you’d like to know more about crowdfunding as an option for alternate lending check out this article at fundable.com, a popular crowdfunding platform that generates over US$1million a week in funding for startups - and also check with South Florida Funding Group: 786-544-2700.

Microfinancing

Microfinancing provides an alternative means of financial loans to individuals and small businesses who do not have the necessary access and requirements to seek loan approvals from traditional banking services.

Microfinancing is provided for low-income people, typically in developing economies, to have access to the opportunity of capital whereby they may be excluded from traditional banking loans because of their low-profit margin or low-income status.

Entrepreneurs, startups, and small businesses without investors can seek business loans through microfinancing. Microfinancing also assists the same economic group with savings accounts, health services, networking support, and other financial services where a bank won’t help.

Cash advances

Alternative lenders can agree to provide you with a cash advance, up to an agreed limit, with the intention of you paying it back when you’re able. It is typically a short-term loan that can be issued by banking institutions or alternative finance associations to give applicants a chance to gain capital within a certain timeframe and once earned, pay the loan back.

These types of loans generally have a higher interest rate than others so whatever you borrow, you may end up needing to pay back that plus hundreds, or thousands more, depending on the agreed-to arrangement.

Bootstrapping

Bootstrapping in business is where a company is started with the funds of personal savings only. There is no reliance on crowdfunding, investing, on loans from either a bank or an alternative lender.

Self-funding can be risky, scary, and exhilarating all at the same time but if you have a dream or a project plan and you have the means to afford it off your own back, then bootstrapping might be the way to go.

Bootstrapping saves you from having to apply for a loan, repay interest on approved loans, and have a business without other investors that you don’t trust.

If you haven’t figured it out yet, it’s called bootstrapping because entrepreneurs, or self-funded business startups, must “pull themselves up by their bootstraps” and get the job done without any help.

Grants

Grants refer to government funds granted, or gifted, to fund ideas and projects for public and community services.

Grants are often used to help in recovering economic situations to help stimulate the economy where it is needed. For example, grants have been given for community events to try and easy the affects of COVID restrictions and lockdowns. Grants are assisting with getting money flowing in local communities again where it is drastically needed.

Businesses, groups, and entrepreneurs can apply for grants through government support systems and the grant money is divided between the applicants based on where the government body sees fit.

Grants are not loans and as such do not need to be paid back once granted to the awarded party.

Working capital loans

Working capital loans are much like a traditional loan but are approved through alternative financing options, and fairly quickly.

If you need cash quickly to finance your everyday business operations, a working capital loan is a solution for you.

This can help if you owe employees pay but are short on funds for the week or if you need to replace stock and inventory or to pay rent.

Working capital loans are for everyday short-term expenses only and are not considered a long-term loan for longer business funding options. The repayment rates can range from as little as 3% up to 99% so it’s a good idea to check through the terms and conditions very closely before you choose a company for a working capital loan.

These types of loans might be a good idea for those needing to bridge some gaps in their funding structure for day-to-day finances.

Borrowing from friends and family

Borrowing from family and friends is a type of alternative finance solution whether it’s written in a contract or not.

If family and friends have offered to assist in the financing of an idea and/or project for your business, they can gift the money if they choose as a donation, or you can arrange the money as an investment or a free or low-interest loan.

Having support from loved ones is always an advantage when operating a startup or small business. It’s important to not take advantage of family and friends when they have assisted with getting your business up and running and if you have made a valid agreement with them, you should stick to it the way you would if an outside investor loaned you capital for your business.

Pros and Cons of Alternative Lending

Getting straight to the number one advantage of alternative lending options is that where banks will most likely not give you a loan for whatever reason, you have a greater chance of achieving a loan with an alternate lender.

Below you will find that we have included high-interest rates as a disadvantage, but we should also point out that this is dependent on the type of alternate financing option. In some cases, interest rates with alternative lending solutions can be much lower than traditional banking rates.

Here are the main advantages and disadvantages of going through an alternative lender for your financial needs:

ADVANTAGES:

• Alternative finance offers a wider variety of loan options over a conventional bank loan as well as a simplified application process
• Loans can be granted within days
• Investors become business partners
• Some alternate finance options offer more flexibility with how the money is used. Banks on the other hand may need specific reports and tracked data on how the money has been spent.

DISADVANTAGES

• If you have a low credit score, are a startup, can’t prove your financial background, interest rates may be much higher than that of a bank.
• Repayment terms tend to be shorter than traditional bank loans (e.g. where a bank might agree to a repayment term of 2 years, an alternative lender might offer a maximum of 1 year). It's also typical of an alternative financial lender to require more frequent repayments on a loan. This could mean repayments are due weekly, or sometimes even daily.
• Having a business partner might suit some, but others might take offense to investors changing or altering certain plans and ideas to suit themselves better. When investors are getting involved in the alternative financial situation, it’s a good idea to have clear and valid contracts drawn up and signed by both parties to avoid any legal drawbacks.
• If you choose to go down the road of peer-to-peer or investor crowdfunding, your say in how the finances are spent is limited

Where one type might suit a friend of yours, it might not be the right one for you and your business project. We highly recommend researching each type of alternative lending arrangement in-depth to avoid any unnecessary situations where you find yourself or your business put out. While there are numerous alternative lending options to consider, it’s important that you understand the pros and cons of each type of alternative financing option.

Reasons Why Alternative Finance is a Good Idea for Your Business Loan

According to fundingcircle.com, banks reject around 80% of small business loan applications each year. For entrepreneurs looking to start a small business or startup project, this is a scary amount of rejected applications.

A small business loan is, on average, less than US$100,000 but is measured by the Federal Reserve to be a maximum of around US$663,000. If you’ve recently applied for a loan under US$663,000, or more accurately as typically more than half of the small business loan applications show every year are under US$100,000, there are a few reasons why you might be rejected by a traditional bank.

Here are the main reasons for banks rejecting small business and startup loan applications, and why you should consider alternative lenders to get a business loan:

You have a low credit score

The number one reason you should consider seeking a loan from alternative financing is that your personal credit score is less than 800, your business credit score is less than 140, or you don’t have a credit score at all.

Banks generally look to approve loans for people who have a good credit rating over at least 800 or 140 as a minimum. Without this, you might be doomed for rejection. But that’s alright because an alternative lender might approve you for a small loan anyway.

There are ways to repair your credit score that should also assist with your application through an alternate lender, but they typically find other means of helping you with a small loan, like higher interest rates.

Take a look at this blog by Easy Knock to learn how you can start repairing your credit rating. Keep in mind that even if you currently have a good personal or business credit score, banks look into your credit rating history also.

You have too much debt

Where banks will automatically see too much debt as a giant red flag and disapprove immediately, alternative lenders might seek further information and see opportunities in your built-up debt.

Alternative lenders can be far more lenient with business loans, but they’ll also charge you at a higher repayment interest rate for safety measures. Just because they provide an alternate means of financing solutions, doesn’t mean they won’t be smart about it.

Too much existing debt is generally a sign that you have applied for and been approved of loans in the past and not paid them back. If you can plead your case and show proof of being able to pay back a small business loan, an alternate lender may just approve you for that small loan where a bank wouldn’t.

You have a weak business plan

You can’t just walk into a bank, apply for a loan because you have a great business idea, and expect to have your application approved.

Banks require a lot of documentation including income statements, balance sheets, high credit scores, personal and business income returns, savings details, evidence of solid cash flow, a strong business plan, how you intend to use the loan if approved in the detailed description, and an annual income of at least US$20,000 before they will even consider lending out small business and personal loans.

A business forecast with details on cash flow and costs will help with your business loan application but where banks need further and in-depth financial information, alternative lenders might not need so much information. Especially if you’re going with crowdfunding, cash advance, or working capital loan.

Conclusion

If you’re looking for easy access to an approved business loan with the possibility of lower interest rates and the freedom of business cash flow without a strict structure, alternative lending is the solution for your business.

Alternative lending is predominately aimed at providing fast capital for startups and small businesses to be able to fund their businesses ideas and developments successfully. Alternative financing is a sure way to support businesses in need of economic recovery.