Obtaining funding for your small business can be challenging, even in the best of times. During periods of economic instability or downturn, however, securing funding via traditional avenues can seem almost impossible, especially if your small business doesn’t meet the requirements for conventional financing. That’s why it is important to consider other avenues for raising capital.
Here’s what small business owners need to know about available alternative lending options.
[Read more: A Guide to Startup and Small Business Financing]
What is alternative lending, and how does it work?
Alternative lending, also known as fintech or online lending, is any financial lending provided by nonbank lenders that operate outside the traditional lines of credit and other banking lending options.
Small businesses may obtain a better funding experience by pursuing loans from nonbank lenders. Benefits include more flexible repayment terms and fewer processing fees typically associated with small business loans. In addition, these lenders, who usually raise their own funds to lend to small businesses, operate solely online, allowing them to provide more flexible qualification requirements and expedited application processes.
Alternative lending versus traditional lending
When researching funding options, small business owners should consider the following key differences between alternative and traditional lending.
Traditional lending:
- Employs strict eligibility requirements and may require excellent credit backed by multiple years in business.
- Typically only funds large loans with interest rates between 6.43% and 12.45% and repayment terms of 60 months.
- May require an in-person interview process with extensive documentation, meaning it may take several weeks for small businesses to receive the funds.
Alternative lending:
- Allows for flexible eligibility requirements and is usually open to working with entrepreneurs and small business startups.
- Typically funds smaller loan amounts with interest rates ranging from 6% to 99% and repayment periods of several months to two years.
- Usually, small business owners can apply for loans online with minimal documentation required and can expect to receive approval and funds in as little as 24 hours.
Microloans are very low-value loans, typically worth $50,000 or less, with shorter repayment periods, sometimes only a few months.
Types of alternative lending
There are many types of alternative lending for small businesses. Here are some of the most common options available.
- Bridge loans: Bridge loans are short-term loans—often taking less than a year to pay back—with hard assets as collateral to back them.
- Installment loans: Installment loans can give small businesses a lump sum on a fixed repayment schedule. These loans are commonly used for purchasing company equipment, vehicles, or property.
- Invoice factoring: For this type of financing, a business sells its outstanding accounts receivable for cash to a third-party company, typically valued at about 90% of the accounts receivable value.
- Merchant cash advances: This type of advance gives businesses a quick injection of cash upfront in exchange for a percentage of their future daily credit card receivables.
- Microloans: Microloans are very low-value loans, typically worth $50,000 or less, with shorter repayment periods, sometimes only a few months.
- Short-term loans: Like microloans, short-term loans have repayment terms of less than a year, and they’re great options for small businesses that need working capital. While most banks don’t offer short-term loans, alternative lenders typically do.
[Read more: Guide to Using Microlending to Fund a Business]
Nonbank alternative lenders for small business loans
There are several reputable nonbank alternative lenders for small businesses. Here are a few options to explore.
- Accion: As a global nonprofit, Accion works to find and help build innovative companies through investing capital and providing strategic governance and advice to build clients’ financial health and well-being.
- Fora Financial: Fora Financial provides funding to small businesses and entrepreneurs. To date, they’ve lent capital to more than 55,000 small businesses.
- Fundbox: Fundbox offers small businesses access to working capital. After submitting a paperless application, Fundbox can approve small business owners and entrepreneurs in as quickly as three minutes, and send the funds as soon as the next business day.
- National Funding: National Funding provides various funding and equipment leasing options for small business owners and entrepreneurs to upgrade and grow their businesses.
- SBG Funding: A niche business finance firm, SBG Funding helps small business owners cut through the stringent regulations of traditional banking to secure the funding they need via flexible financing solutions.
[Read more: How to Get Funding for Your Inventions]
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
Your hard work deserves to be rewarded! Apply for our premier small business awards program, the CO—100, to earn national media attention, get VIP access to premium networking events, and potentially be awarded $25,000! Apply and learn more, here.