The Top 3 Advantages of Alternative Lending
Alternative lending exists when traditional bank loans and financing is out of reach. Banks have become more restrictive in the past decade, causing businesses to seek out different ways to finance their operations. Small- and medium-sized businesses are highly likely to be rejected for bank loans. Providers of alternative loans are usually non-bank companies who are more accepting and more likely to approve loans. This new industry has seen growth, making it profitable for lenders to offer loans. The flexibility and speed, along with reduced paperwork, have made these loans a very attractive funding alternative, despite slightly higher interest rates.
Factoring is one way businesses have dealt with cash flow issues or needing to fund growth. Factoring is when a business sells its accounts receivables to a factoring company at a discount. The business gets immediate capital, instead of waiting 30 to 60 days for a customer to pay an invoice. The financier reviews the value company’s receivables, not the business’ credit history or risk. The factoring company then becomes the invoice collector and bookkeeper. The factor also assumed the credit risk.
Merchant cash advances are another method of alternative lending, where capital providers provide businesses with cash in exchange for their future credit card sales. This is a good option when a business owner’s personal credit is not the best and the business needs immediate cash. The lenders review the average monthly credit card receivables and offer a short-term loan. The loan is paid back from a portion of every credit card transaction. There are no fixed payments or due dates, along with no interest rate. However, the cut of the receivables could run up to 17 percent.
Microloans are one more growing alternative lending method, where small amounts are lent. They are usually short-term loans with low interest rates, made available to self-employed individuals, small businesses with a few employees, or new startups that don’t have high capital requirements. These loans benefit businesses with lower credit scores that otherwise wouldn’t qualify for traditional bank loans. Less documentation is usually required also. However, the interest rates on microloans could be higher, between 12 and 18 percent.
These and other types of alternative lending offer financing options to small businesses when traditional banks are not an option. Entrepreneurs can get the funds they need to start or grow their businesses, handle emergencies, and be ready for negative situations. These lending options allow for more businesses to succeed, which in turn contributes to economic growth.