What is Alternative Lending?



alternative lending

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Small businesses and individuals who don’t want to go through traditional banks, pay attention. Alternative lending is a way to get the funds you need. Alternative lenders can cut through traditional red tape.

They supply business financing that is characterized by accessibility, flexibility, and speed. Plus, you can get a loan without needing to go through traditional channels. All good reasons to keep reading. And learn more about this option that’s great for small businesses.



What Is Alternative Lending?

Alternative lenders focus on business loans that usually have higher interest rates. But there’s a payoff, Like streamlined applications, and more relaxed requirements. Plus faster times to fund these installment loans.

Many alternative lenders typically complete the process digitally. These online lenders use software to come up with financing options, get installment loans, and other types of loans early.

The Alternative Business Lending Industry in 2022

This type of business financing is real competition for traditional loans. Transactions in this type of fast funding are projected to hit $344.50 billion this year. That’s worldwide. This comes at a time when traditional bank loans will come with higher interest rates.

Many business owners are looking for alternative lending options, as opposed to those from a conventional financial institution, here’s why.

Why You Should Consider Alternative Lenders for Small Business

There is more than one reason why an alternative lender is good for small businesses. Consider the fact that 29% of SMBs run out of capital and fail. In other words, cash flow can be an issue.



Following are five reasons why SMB’s should consider these alternative small business loans.

The Application Process is Fast

An alternative lender uses digital technology for the application process. You can apply for an alternative business loan and hear back in as little as 24 hours. That’s perfect for credit business lines looking to move quickly.

Traditional lending involves a longer process. Loan officers take more time to make sure your business is legitimate and low risk.



You’re in a High-Risk Industry

Alternative lending refers to different types. There are online lenders and private lenders as well as crowdfunding and marketplace lending to look at. Traditional lending institutions make it harder for high-risk industries to get funding. Some examples include the financial industry and construction.

There Are More Loan Options

Alternative online lenders offer different loan options and get processed quickly. These are generally short-term loans that include:



  • A Business Line of Credit. Take the money when you need it.
  • Equipment Financing for buying equipment. Eligibility is determined by the value of the purchase.
  • Invoice Financing. Alternative lenders offer loans based on unpaid invoices.

There are others to choose from.

Your Business Has Low Credit

The business owner with a lower credit score can get money from an online lender. Banks generally require credit scores of 600 or higher. However, alternative lenders are more flexible.

Lax Restrictions On How You Use The Money



Alternative business lenders let you use the money as you see fit. Basically, inventory and equipment financing might be the exceptions. On the other hand, a bank loan often requires a detailed plan.

Top Alternative Lending Options for Small Business Owners

Avoiding a traditional bank loan means finding alternative lending companies. Find one that offers these options for your alternative loan.

1. Merchant Cash Advances

These are common,  but they are best suited for SMBs that do business via credit cards. Get the advance and pay it back with a percentage of those transactions and a merchant cash advance fee.

2. Invoice Financing

Also called invoice factoring. Get money based on outstanding invoices. You can get 85% of the value up front and the rest (15%) paid to you when the invoices get paid, minus the fee. Invoice financing is a quick option.



3. SBA Loans

These are guaranteed by the government. They have low-interest rates but long terms. Here’s what the small business administration wants you to know. Your personal credit score will be reviewed as well as your business credit score.

4. A Business Line of Credit

These products work this way. Take the money when you need it and pay it back with interest, and then these business lines reset. Big bank lending models have these too. But they’re harder to qualify for. The alternative loan process is streamlined.

5. A Term Loan

Often the same as a traditional version. There are fixed or variable rates and set payments. One difference being there are higher interest rates and shorter terms.



How Do Alternative Lenders Work?

These companies supply business loans. When a business doesn’t meet minimum annual revenue standards from a bank or when their business credit or personal minimum credit score isn’t up to the mark.

Alternative loans have more wiggle room in how they put together their products. They take on what the bank might see as bad credit. They are quicker than banks and credit unions. But that generally spells higher rates.

What Are Examples of Alternative Business Loans?

Interested in this type of small business loan? Here are some examples to consider.

  • Fintech. You might be able to get lines of credit here. But these alternative financers operate solely online. You’ll get automated accounting and online payments with Fintech. Kabbage is one of the companies called alternative lenders that can help.
  • Peer to Peer Lending. People lend and borrow from each other.
  • Not For Profit Lenders. Got a positive record with your community? But only been in business a short time? Get lines of credit for under $50,000.
  • A Credit Union. A good solution if your working capital is low. Installment loans have fixed interest rates.

What Low Risk Alternatives to Cash are Available to Businesses?

Traditional lenders most often need collateral. Some of the best low-risk alternative options that don’t need collateral include:



Term Loans.

Get a lump sum to buy fixed assets like a new building.

Peer To Peer Lending

Investors get together to pool money. These loans are unsecured.



Lines of Credit

The money can be borrowed as a small business needs it. Remember, unsecured ones have higher interest rates.

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Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

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