Many small business owners in the United States find the task of financing their business a challenging one. After all, investing money in a startup is a risk most people would not be willing to take. Perhaps that is why the business loan rejection rate is an ominous 20%, meaning every one in five businesses fails to acquire a small business loan. However, those odds are improving steadily with more and more avenues opening up for small business owners, in the form of alternative lenders.
What is Alternative Lending?
Before you decide whether alternative loans are fit for your business needs, it is important to know exactly what they are.
In layman terms, alternative loans consist of all loan options that are available to consumers and business owners outside of conventional bank loans. They are provided by alternative lenders who appeared on the scene back in 2005 as UK-based lender Zopa who pioneered peer-to-peer (P2P) lending, quickly followed by US contenders Prosper Marketplace and Lending Club in 2006 1.
The alternative lending industry has only gained momentum ever since and recorded $502 million of total transactions value 2 in 2018 alone. They are now one of the most popular ways to acquire a small business loan. In addition, you can consult online lending platforms, such as orumfy, who can help or guide you through the process of how you can acquire SBA loans. Through such online lending platforms, you can safely trust all lenders that you engage with and get through the process smoothly and swiftly.
What Type Of Loans Are Included In Alternative Loans?
Be it for a business line of credit, a merchant cash advance or equipment financing, alternative loans provide you funding for it all. Let’s take a look at what kind of loans you can get using this method:
- Business Lines of Credit: Business lines of credit work slightly different from business credit card, since in this type of financing the lender sets up a pool of capital reserve from which you can draw financing. The interest is only charged on the amount used from that reserve and once it is paid then the reserve is replenished.
- Merchant Cash Advance: MCA is a type of financing in which the lender provides funding in exchange for a percentage of your daily credit and debit card sales. This option is usually afforded by businesses that have an extremely low credit score and require quick inflow of cash.
- Equipment Financing: In this type of financing, the borrower offers up equipment assets as collateral for the loan. The greater the value of the equipment offered up, the higher will be the loan.
- Peer to Peer (P2P) Lending: This involves the direct borrowing of funds by a business owner from a business owner. There is, of course, an online regulatory platform that brokers the deal but only to the extent of determining the risk factor of the borrower after which a business owner or a group of them act as the lender by pooling their resources together and giving the loan.
- Bad Credit Loans: They are the same as normal business loans except for businesses with a poor credit score. This results in the borrower having to pay higher interest for the amount borrowed.
- Startup Loans: Specifically designed for startup businesses that have only been operating for a short time and do not have stellar credit scores. Small amounts are offered at first but as the startup finds its feet, larger sums are loaned out at higher interest rates.
Pros and Cons of Alternative Lending
Right off the bat, alternative lending looks like a better option for all those businesses that struggle fulfilling the strict requirements of banks and SBA loans. There are more loan options, more lenders, and larger loans being offered in a shorter period.
With loan applications being processed in as little as a week, alternative lending remains a great option to get quick financing for your business. It is feasible for businesses that do not have a high credit score and fail to generate the required revenue to get conventional bank loans. Alternative lending also offers disintermediation; cutting out the hassle of dealing with financial institutes.
The interest rates for alternative loans are the most glaring drawback. Investors in alternative loans generally expect to make about 8% through a full market cycle, net of fees and losses due to charged-off loans. That compares with the current yield of less than 0.25% on bank deposits 3. Due to the steep interest rates on loans, many businesses may struggle to keep up with repayments.
Another concern is that of fraud. Most business owners hesitate before applying for small business loans with alternative lenders because of authentication doubts and procedural complexities.
However, this concern is addressed by engaging with alternative lenders through online lending platforms, which provide ease and transparency in the loan application process.
Do Alternative Loans Suit Your Business?
If your business has been rejected for conventional bank loans and you are still wondering how to choose the right small business loan, then alterative lending is the answer. Or if you want to get quick financing for your business without having to go grind through the tedious and slow process of SBA loans then you should definitely opt for alternative loans. In the end, it comes down to knowing your own business needs and assessing which loan option best fulfills them.
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