As a small business owner or start up, you know that getting the funding you need to finance your venture is an essential first step. But if you find the idea of going to a traditional lender or bank too time-consuming or intimidating, then you’re not alone. In the past decade, a growing number of small business owners have turned to alternative lending.
To put it simply, alternative lending is lending that takes place outside of a traditional banking institution. Alternative lending is a prominent part of the financial landscape these days, but it wasn’t always that way. After the financial crisis of 2008, and the Great Recession that followed, big banks became more selective about who they lent money to. As a result, many businesses who may have once qualified for loans were being rejected. Alternative lenders started popping up to fill in the need for small business financing.
What Are The Differences Between Alternative Lending & Traditional Lending?
There are three ways that alternative lending and traditional lending are different:
- Speed: The application and approval process for alternative lending is much faster than traditional lending because alternative lenders take full advantage of technology. You can apply online and have an answer within minutes. Applying for a bank loan can take weeks or months as you gather paperwork, meet with the bank several times, confer with your tax advisor, and simply wait for a decision.
- Flexibility: Banks offer three options for borrowing money—loans, lines of credit, and business credit cards. Furthermore, banks won’t even want to talk to you if you’re asking for less than $250,000. Alternative lenders, on the other hand, will make loans as low as $5,000 and can be more creative with loan terms. You may even be able to use an outstanding invoice or a piece of equipment as collateral.
- Affordability: Because traditional banks are so selective with whom they loan money to, they can afford to charge lower interest rates. They’re only loaning to those businesses that have an extremely high probability of paying back the loan. Alternative lenders, on the other hand, tend to approve more high-risk candidates who have lower credit scores, shorter times in business, and lower cash flow projections. In order to balance out the risk, alternative lenders charge higher interest rates than traditional banks.
What Are The Advantages Of Alternative Lending?
If you’re a small business owner or entrepreneur, then these are the main advantages of getting your funds through an alternative lender:
- You save time: You’ll spend much less time and energy applying for an alternative loan than a traditional loan. You can put that saved time into the other needs of your business.
- You get capital quickly: If you need money sooner rather than later to fix a leaky roof, replace broken equipment, or you just need cash in your accounts, then you’ll get the money faster by choosing an alternative lender.
- You can be more innovative: Let’s say you want to try a new marketing campaign, offer a new product, or hire staff so you can expand your hours. You can turn to an alternative lender to get the funds you need to grow your business in ways you may not have tried if traditional banks were your only option.
- You can build good credit: If you pay your alternative loans on time, you can build up your credit score, which can open you up to better lending options in the future.
What Are The Disadvantages Of Alternative Lending?
Of course, alternative lending may not be for everyone. There are a few disadvantages:
- Higher interest rates: As discussed earlier, you’ll pay higher interest rates with an alternative lender than you would with a traditional bank.
- Smaller amounts: An alternative lender may approve your loan, but for less than what you originally asked for, leaving you in the position of having to find additional sources of capital.
- More frequent repayment terms: Your alternative lender may require you to make bi-monthly, weekly, or even daily payments on your loan, which can start eating into your cash flow.
But remember, these are disadvantages when compared to traditional bank loans. These disadvantages may become less important if you already know that getting approved for a bank loan isn’t an option.
Consider Alternative Lending
Alternative lending is now a major part of the modern financial landscape. Without alternative lending, far fewer small business owners would be able to secure the funds they need to start their business, grow, and innovate.
If you are interested in alternative lending, then check out LendersPool. LendersPool works with a variety of lenders that provide all kinds of small business funding options. Simply fill out a quick application, and you’ll be matched with offers from a variety of lenders who want to loan you money. You can review the loan options and choose what works best for you. If at any point you have questions, LendersPool has live experts available to explain the options and help you make a decision. You’re in the driver’s seat the entire time. Don’t let a lengthy and intrusive bank loan process stand in the way of you realizing your dreams. Fill out a quick application on LendersPool and get your business going.