Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Alternative Lending Options For Businesses
Jun 29, 2022
Image Credits: Pexels
With the rise in inflation and constantly changing market trends, no business can depend on personal finances or short-term investments. Instead, they have to look for additional funding at one point in their corporate life.
However, sadly, banks aren’t famous for lending ‘required money’ to start-ups and small businesses anymore.
No longer can you have a stellar credit report and be on your way to applying for a business loan. Why? Because so many other experienced owners think the same and thus banks are entitled to grant loans to absolutely risk-proof applicants.
So, it makes sense why so many small-scale businesses resort to alternative lending options to resolve the crisis in their steady cash flow. Need to know more? Here’s short yet comprehensive research:
What Is Alternate Lending?
The phrase "alternative lending" refers to a broad range of loan choices available to individuals and businesses in addition to standard bank loans. Alternative lending encompasses a wide range of finances, including:
- Direct lending
- Equity funding
- Debt financing
Alternative lending firms specialize in commercial funding and financing alternatives rather than all services a regular bank provides. Additionally, alternative lenders offer more latitude regarding criteria for loans, such as creditworthiness, annual income, and good credit score.
See: Fastest Way To Raise Your Credit Score
Alternative lenders are often more accommodating to modifications in repayment plans. However, one thing to understand is that every good thing comes with a price! So, alternative financing typically has higher interest rates than traditional banks or lenders.
Common Alternative Lending Options
Alternative lending can be a better pick for businesses that can’t fulfill the loan requirements of standard banks. The reason is the flexibility when it comes to deciding the money you need and the repayment plan you wish to have.
So, here are some of the alternative lending options you can consider for your business:
1. Term Loans (Short / Long)
Commercial term loans are types of credit that provide you with a large sum of money, which you normally repay over a predetermined period and in fixed amounts. Term loans provided by alternative lenders resemble those provided by traditional lenders in many ways.
The majority of alternative lenders provide short-term loans. However, some of them may also offer long-term possibilities.
- Short-term loans are simple to qualify for, typically disburse within a day or two, and last for one or two years.
- Long-term alternate loans can have a five-year maximum repayment time and are good for expanding business and stabilizing cash flow.
However, keep a look at the interest rates for long-term alternative lending before making the decision.
2. MicroLoan
Alternative lenders developed these loans because many commercial banks deem them too short to issue. In fact, the low-value funding (microfinancing) is often below the figure of $50,000.
However, for a small business owner, the sum can be sufficient for a small business owner to pay for new machinery and employees or to increase production.
According to clear co, the goal of microfinancing or microloan is to provide the small yet needed money to start-ups or new companies that don’t qualify for large loans or can’t afford to repay the huge loan. Although there may be limitations on how you can use the funds, microloans often cover operational expenditures, supplies, and other similar resources.
3. Line Of Credit
It is just like a typical line of credit allotted by a traditional bank to consumers. However, it might be easy to qualify for it and actually get it from an alternative lender than a standard bank.
- It is a set sum of money that you can use as you need it and either pay back right away or over a specified repayment time with a decided interest rate.
- You only pay what you’re using as it is a fixed amount as your business line of credit.
A line of credit can serve as a security for a business. It is a great alternative financing option for a firm that doesn't need a certain sum of money but needs access to additional capital to cover emergency expenses.
4. Crowdfunding
Some firms can raise money online from their peers by using crowdfunding. Instead of looking for one financing source, enterprises can combine small investments from a number of people via crowdfunding platforms.
- The borrower typically establishes a goal and pitches their campaign to draw in possible funders.
- Crowdfunding has the advantage of looking for funds without going through the application process.
Success is not assured, though; it depends on how effectively you sell your cause and how many lenders support it. Additionally, not every type of business will benefit from it, so do your research first before choosing this option.
5. Invoice Financing
It's not often provided by a traditional bank, unlike other alternatives. When unpaid invoices limit a company's cash flow, B2B and service-based companies frequently turn to invoice financing.
- A company sells its unpaid accounts receivable to the lender (known as the "factor") for a small discount.
- A company can typically anticipate receiving upfront payment for 90% of the worth of its accounts receivable.
- After that, the factor is in charge of collecting the payments.
- The factor's projected profit equals the 10% it saves on the lower purchasing of the company's accounts receivable.
Bonus: Bibby Financial is an alternative lender in Canada that offers invoice financing to small or large-scale businesses.
Final Thoughts
Getting capital for a small business can be extremely challenging. Most banks demand excellent credit, a good reputation, and long experience from the applicants to qualify for the loan. However, still, there's no assurance you'll be approved, especially if you're a start-up competing with the big sharks to secure the funding.
Here comes alternative lending to the rescue!
Due to the convenience, flexibility, and practicality, alternative lenders are a better option for small business owners than banks. The reason why more and more businesses are opting to look for alternative lending options.
Are you one of them? We have curated 6 choices for you. Read them above!
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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