Years ago, banks were the go-to sources for business loans. If you needed financing to expand your business, you walked into your local bank branch, filled out an application, and most of the time, walked out knowing that you would soon have the money you needed. And if you didnât qualify? In most cases, you were just out of luck.
However, times have changed. The growth of the internet has offered a platform for a new form of lenders: alternative lenders. This couldnât have come at a better time, either. Although the economy is bouncing back from the recession, banks are still hesitant to loan to businesses, especially new businesses, startups, and business owners with less-than-stellar credit scores.
Business owners have more choices than ever thanks to alternative loans. But what are alternative loans? Where can a business owner apply? How do alternative loans differ from traditional bank loans?
Read on to learn more about alternative loans and how they can benefit your business in a big way.
What Are Alternative Small Business Loans?
Alternative small business loans are loans that are issued outside of the context of a bank. This is why theyâre also known as non-bank business loans. Alternative lenders provide loans and other forms of financing for business purposes. This could include the purchase of commercial real estate or equipment, working capital needs, or any other business expense, large or small. Small businesses often turn to these alternative lenders when they cannot qualify for a traditional loan from a bank.
How Are Alternative Business Loans Different From Bank Loans?
While bank loans are available only through banks, alternative loans are available through financial groups, nonprofit organizations and community groups, or even individual investors.
Bank loans can only be obtained through a bank branch. This often requires an in-person visit or at least a phone call from the applicant. On the other hand, alternative business loans can typically be completed online from start to finish. The application process, submission of documentation, and even approval and funding can be handled via email or secure online portals.
Qualifying for an alternative business loan is typically easier than qualifying for a bank loan because requirements are not as strict. There are fewer paperwork requirements and more flexibility. Alternative loans are also approved and funded more quickly than bank loans.
Bank loans are known for their favorable rates and terms. While interest rates vary across lenders, alternative loanÂ rates are typically higher than those offered by bank loans, with the best interest rates reserved for borrowers with the best credit scores.
Types Of Alternative Loans
One of the best things about working with alternative lenders is that there are many different options available to fit the needs of small business owners.
Installment loans are one of the most common types of financing. An installment loan provides a business owner with one loan disbursement for a set amount. The loan is paid back with fees and interest over a set period of time through scheduled payments.
Installment loans are generally the most flexible of all business loans. These funds can be used for any business expense. Installment loans are best for businesses that need money for larger purchases, such as real estate or company vehicles. For the most qualified buyers, interest rates for installment loans can be competitive with bank loans.
Business Lines Of Credit
A business line of credit works just like a credit card. A business can make multiple draws against the line of credit up to and including the credit limit set by the lender.
A business line of credit is great for emergencies or for use as working capital. Interest is paid only on the portion of the credit line that has been used.
A short-term loan is a loan that is paid back like an installment loan, only the repayment period is much shorter â typically one year or less.
Short-term loans often come with the highest interest rates, so it is best to only use these for emergencies. These may also be an option for business owners with low credit scores. Taking out a short-term loan and repaying it as promised can also help business owners boost their credit scores to qualify for more affordable loans in the future.
Unpaid invoices can leave businesses in a bind. Instead of waiting for customers to pay, business owners can use invoice financing to get the money they need immediately.
There are two types of invoice financing. With invoice factoring, a portion of the invoice is paid to the business. The lender then collects the total invoice amount from the customer. The remainder of the invoice is paid to the business owner, minus any fees and interest charged by the lender.
With invoice discounting, the lender pays a large percentage of the invoice to the business owner. The business owner then collects the payment from the customer. Once payment has been collected, the loan is paid back, including interest and fees.
Most business owners that use invoice financing do so to resolve cash flow issues. These loans are distributed quickly and often do not require high credit scores to qualify.
Why Get An Alternative Business Loan?
Getting a loan from a bank can be difficult, even for the most qualified borrowers. Small businesses often have unique financing challenges that require flexible and creative financing options that only alternative lenders can offer.
You Need A Loan Fast
Bank loans are great because of their low interest rates and great repayment terms, so many businesses find that these loans are worth waiting for. Often, though, the waiting period can be weeks or even months if complications arise during the process — and this can be a hardship if a business needs money immediately. This is when alternative lenders are beneficial.
Most alternative lenders offer a fast and easy online application process. Because there isnât as much paperwork typically required, this also helps shorten the timeline. Depending on the lenderâs policies, the amount of the loan, and the loan type selected, some alternative business loans can be approved and funded in just days â and in some cases, as short as 24 hours.
Waiting for weeks to obtain a loan can at times be detrimental to a business if an emergency arises or even during slow seasons. Alternative lenders can work quickly to provide a business loan exactly when itâs needed.
You Have Poor Personal Credit
A poor credit score can affect anyone. There are a lot of factors that can bring down a credit score, including a history of late payments, high balances on credit cards that are slowly being paid off, or too many credit inquiries. As many small business owners have discovered, most banks will speedily reject a business loan application due to a poor credit score.
Since bank loans boast such favorable rates and terms, these are typically reserved for business owners with the highest personal credit scores. While those scores in the high 600s may qualify for bank loans, scores of 700 or above are typically preferred. This is why many business owners with low credit scores turn to alternative lenders.
Alternative lenders often have less stringent credit score requirements. In some cases, scores in the 500s may even be approved, depending on the loan selected and the amount of the loan. As with other types of loans, the better the credit score, the better the interest rates and terms with alternative loans.
You Havenât Been In Business Very Long
Most bank loans require a business to be in operation for at least two years. New businesses and startups may be able to get a loan from a bank, but itâs much more challenging than for an established business. Being unable to find financing when itâs needed can stall a new business before it even gets off the ground.
Fortunately, alternative lenders provide a variety of funding options for new businesses and startups when banks and other conventional lenders turn them down. While time in business requirements vary by lender, in many cases, a business only has to be in operation 6 months to qualify for some alternative loan options.
You Donât Make Very Much Money
Bank loans typically go to the most low-risk borrowers: the borrowers with the best credit, the most years in business, and the most revenue. Unfortunately, some business owners seek a loan because they arenât making enough money to fund a much-needed purchase. They go to the bank but are rejected because they arenât earning enough money, so they canât get the help they need to boost their business. Itâs a vicious cycle.
With alternative loans, though, there are options for businesses that arenât bringing in high revenues. Revenue requirements are more flexible with alternative lenders â think $25,000 annually or $10,000 monthly. For many small businesses, this is an easier requirement to meet than the revenue criteria set by banks.
How To Qualify For Alternative Business Loans
Requirements for alternative business loans vary by lender. However, there are a few things to keep in mind regardless of what lender is used and what type of business loan you need.
Your personal credit score is a factor when qualifying for a loan, although alternative lenders will typically approve borrowers with lower credit scores. Borrowers with scores as low as 500 may qualify for some alternative loans, although options may be more limited. The best APR, repayment terms, and monthly payments will generally go to borrowers with scores over 600. Having collateral may help borrowers with lower scores qualify for additional loans or higher limits.
Many alternative lenders will require collateral. For some loans, though, additional collateral is not needed. For example, with invoice financing, the unpaid invoices serve as the collateral.
Even if specific collateral isnât required, a blanket lien or personal guarantee may be a condition of the loan, which is why all loan contracts should be fully understood before signing on the dotted line.
There are no set revenue requirements, but generally, at least $25,000 in annual revenue is needed to qualify. However, lower limits may be available through some alternative lenders. There are also no set requirements across the board for required time in business, although most alternative lenders require that a business is in operations for at least 6 months. Lower time in business requirements may be available through select lenders.
Borrowers will needÂ to request the loan amount needed and describe how the funds will be used during the application process. Borrowers should be prepared to offer collateral, if needed, and should be aware that repayment frequency may vary. While banks traditionally offer a monthly repayment schedule, alternative lenders may have weekly or even daily payment requirements.
It’s also important to view loans from the lender’s perspective. By understanding the five Cs of credit, you’ll have a better idea of what to expect during the application process and how to boost your odds for approval.
How To Find Alternative Business Lenders
You have an understanding of alternative business lenders and youâre ready to apply, but youâre not sure where to begin. Since these lenders are online, itâs easy to find them with a simple search. However, not all alternative lenders are equal. Your search may yield predatory lenders with out-of-this-world interest rates, unclear terms, high prepayment penalties, and unnecessary fees.
Sometimes, itâs easy to jump into a loan without thinking of the long-term costs, especially when an emergency occurs. However, itâs important to understand all rates, terms, fees, and collateral requirements before entering into the loan contract.
Instead of navigating the alternative lender landscape on your own, check out our small business loan comparison chart. Youâll be able to compare requirements, loans offered, maximum loan amounts, and repayment terms without spending hours shuffling through search engine results. When you’re ready to learn more about each lender, take a look at our in-depth reviews to find the lender that’s the best match for you.
You can also check out a loan matchmaking service like Lendio. With Lendio, just one application is all it takes to be matched with more than 75 lenders. Youâll receive the best possible rates and your loan can be funded in as little as just 24 hours. This eliminates the need to fill out multiple applications and helps you avoid many of the hassles associated with finding the best alternative lender for your business loan.
From emergencies to expansions, every small business will encounter financial hurdles that require a little bit out of outside help in the form of a loan. Alternative lenders open up more opportunities for business owners, so you can find the money you need for your business, regardless of what challenges youâve faced in the past when applying for a loan.
The post Alternative Business Loans: What They Are And Where To Find Them appeared first on Merchant Maverick.