The financial landscape is constantly changing. For small businesses that are strapped for cash, keeping up with these fluid trends and developments can almost feel like a full time job. And, while you should never count out traditional financing methods, the reality is that many entrepreneurs and small business owners are turning to alternative financing in 2016. Should you do the same?
What is Alternative Financing?
When most business owners think about financing and funding, they immediately assume that the process involves walking into their bank, answering a few questions, and signing some paperwork. Unfortunately, it's not always this easy.
If you're a new business owner or someone who doesn't look good on paper, then you're going to find it nearly impossible to obtain a traditional business loan from a bank. In most cases, any of the following could prevent you from getting a loan:
- You've been in business for less than two years
- You have a credit score below 640
- You need less than 250,000
These three issues are enough to disqualify a large portion of loan-seeking business owners immediately. And, even if you check out on these three qualifiers, you still have to follow through with a meticulous process that requires you to jump through a number of additional hoops. By some estimates, traditional banks decline up to 80 percent of small business loan applications.
This is where alternative lenders come into play. These lenders help to fill the void for the 80 percent of small business owners who can't qualify for traditional loans. Because alternative lenders aren't forced to follow the rules and requirements laid out by financial institutions and regulatory bodies, they're able to pick and choose how much they want to lend and who can borrow. It's a much smoother process that's based more on merit and need than "checking off" the right boxes.
Whether you need financing to fund a startup, launch a new product, purchase equipment, expand an existing business, or anything in between, alternative financing is here to help.
The Four Major Benefits of Alternative Financing
Now that you understand exactly what alternative financing is and how it fits into the financial landscape, let's take a look at a few of the major benefits. In other words, why are business owners turning to alternative lending as the answer to traditional lending?
1. Less Stringent Qualifications
As mentioned, it's easier to receive an alternative loan. You still have to prove that you're responsible enough to repay the amount, but it's much more fair and balanced than the traditional process.
"Because non-traditional forms of determining credit worthiness are used, often in conjunction with credit reports, lenders can get a comprehensive financial footprint of a borrower that goes beyond credit history," says business expert Kevin Jiang. "As a result, alternative financing is seen by many as being more balanced and fair in terms of making loan decisions."
2. Abundance of Options
Traditional banks prefer to give out business loans of $200,000 or more. They simply don't consider anything less to be worth their time or money. Unfortunately, this means that you're out of luck if you need small amounts of cash at different times.
"Most urgent business financial requirements call for short-term cash infusions," National Business Capital, a leader in alternative lending, explains to clients. "That is where a business line of credit is the best financing vehicle."
A business line of credit allows the borrower only to make payments based on the amount of money borrowed. This self-pacing nature of the line of credit makes it much more ideal for small businesses that tend to have random expenses pop up with short notice.
If you're meeting with a traditional banker, not only is it hard to qualify, but also if you qualify, you'll most likely only have access to a traditional loan. This is just another reason why alternative lending is preferred. There are an abundance of investment vessels and packages from which to choose.
3. Lower Interest Rates
Once again, the bureaucratic nature of banks and traditional lending sources means that there's little flexibility in terms of interest rates. On the other hand, the alternative lending market is competitive, which ultimately drives interest rates down for borrowers.
"Because alternative lenders typically have access to a more comprehensive profile of borrowers, they can offer lower interest rates for loans compared to traditional financial institutions," says Jiang. "Having more comprehensive information about the applicant helps manage risk, as lenders can more accurately determine the likelihood that someone will repay their loan."
4. Faster Approval Process
Banks and credit unions are notorious for having long approval processes. Multiple sets of eyes have to review every application, which can draw the process out for weeks or months. This obviously isn't ideal when you need quick funding.
Meanwhile, alternative lenders -- especially those who operate online -- can sometimes approve an application within hours. At the very least, you should be able to obtain approval during the same week you apply. This makes alternative lending a no-brainer.
Common Types of Alternative Financing
As mentioned, there are many different financing options in the alternative marketplace, and with more being added each month, it's impossible to present a comprehensive list. However, these are a few of the most common:
- Microloans. If you have a really small need, a microloan may be the best solution. These short term loans are typically no more than25,000 and tend to be spread out over five years. There are tons of micro-lenders willing to lend, so you shouldn't have much difficulty finding funds.
There are dozens of other types of alternative financing; these just happen to be four of the most common. As a small business owner, understanding your options allows you to see just how creative you can get.
Consider All of Your Options
Regardless of what the Small Business Administration, banks, credit unions, and other financial bodies try to tell small business owners, it's becoming increasingly difficult to obtain traditional loans. The money simply isn't flowing like it used to. And, if you're lucky enough to get approved, the terms aren't very attractive.
Thankfully, new forms of alternative financing have risen. Make sure that you consider your options and meticulously compare the pros and cons of each. You'll likely find that alternative financing is your best option in 2016.