What is Alternative Lending? The New Business Funding Market

Why read when you can listen?

Click the link below to hear Joe Camberato, President of National Business Capital, explain everything you need to know about alternative lending in the Monjaco podcast!

It’s becoming harder and harder for small business owners to get traditional loans.

Banks are approving fewer applications and cutting back on the amounts they’re willing to lend, but business owners like you still require capital to keep their companies going.

33 percent cite cash flow issues and lack of capital as top challenges, which contributes to the collective need for $600 billion in small business loans every year.

But not all that money is coming from banks.

24 percent of loans are provided by alternative lending companies instead of large institutions, and the popularity of alternative lending continues to grow.

With average loan amounts ranging from $5,000 to $200,000 across lending options, business owners are finding they’re able to get the cash they need without going through traditional channels, struggling with long application processes and waiting months to obtain funding.

What is Alternative Lending?

“Alternative lending” is a blanket term covering all types of funding not sourced through traditional financial institutions, such as banks and credit unions. This includes:

• Online lenders
• Friends and family
• Crowdfunding
• Peer-to-peer (P2P)/marketplace lending

As banks continue reducing the number of small business loan applications they approve, business owners are turning to these alternatives to obtain working capital and supplement cash flow.

Online lending is a popular choice because funding can be accessed in a few days or a few weeks, much sooner than bank or SBA loan options.

Loans are often available without collateral, and credit score requirements tend to be much lower, making many types of alternative lending viable for business owners with shaky financial histories.

The trade-off for these perks comes in the form of higher fees. Although the cost varies depending on the type of loan, you can expect to pay between 7% and 250% in interest when borrowing from an alternative lender. Flexible rate and term options may lessen the impact of these fees, but businesses posing a high risk to the lender usually wind up paying more overall.

Most alternative lenders offer one or more of these popular funding options:

• Secured and unsecured short-term loans
• Business lines of credit (LOCs)
• Microloans
• Accounts receivable financing
• Purchase order financing
• Equipment financing
• Merchant cash advances (MCAs)

Small business owners seeking to qualify for SBA loans may also be able to obtain “bridge” funding for faster access to cash. These loans provide financing upfront in the form of a small business loan to cover the gap between SBA application and approval so that businesses can keep moving forward without delays.

Why Alternative Lending is So Popular for Small Business Funding

Thirty percent of small businesses fail because the owners run out of money, but banks only approve 26.9% of the loans these business owners are applying for!

By contrast, approval rates for alternative funding options stood at 56.8% as of August 2019. That means you’re more than twice as likely to qualify for funding if you choose an alternative lender than if you try to go the traditional route.

Higher approval ratings make alternative loan options accessible to a wider range of business owners. Because many alternative financing types cater to businesses with lower credit scores or less stable financial histories than banks are comfortable with, business owners facing tough circumstances are able to get funding to put their companies back on track.

The flexibility and speed of alternative options is attractive when time is of the essence, or you need a personalized repayment schedule to avoid the risk of defaulting.

Most alternative lenders also try to steer clear of using just one financial metric to determine whether or not they’ll lend to your business.

Banks tend to focus on credit score and scrutinize stacks of financial paperwork, while alternative lenders take a multi-faceted approach to measuring creditworthiness.

Many are focused on building relationships with their customers, seeking to support the growth and success of the businesses that borrow from them and establish long-term connections that will encourage businesses to borrow again should they desire more financing in the future.

Banks, on the other hand, decreased small business lending from $659 billion in June 2008 to $543 billion in June 2011. Total volume of small business loans dropped by more than 38% in the years between 2006 and 2016.

Why?

One reason is that smaller loan amounts simply aren’t profitable enough for big banks to justify. Instead, they’re doubling down on larger entities with greater funding needs.

Is An Alternative Lending the Best Small Business Funding Choice for You?

The changes in traditional lending don’t mean a bank loan isn’t ever a good option. So, how do you know whether to go with an alternative lender?

It depends on how much funding you need, how quickly you need it and whether or not your business can meet stringent bank qualifications. If you can show a good credit score, a solid financial history and detailed documentation, you may be able to get a traditional loan.

However, if you’ve previously been rejected for a bank loan, you’re trying to launch a startup or you only need a small amount of funding, you’re likely better off comparing top alternative lenders to find one that offers:

• A wide range of loan sizes and options
• Loans for businesses with low credit scores
• Clear disclosure of rates and fees
• Flexible terms for the funding option you want

Beware of predatory lending practices, which can sink your business into a vicious cycle of debt instead of giving you the freedom to grow. You can spot a predatory alternative lender by watching out for:

• Fees required upfront
• Unusually high loan charges
• Asset-based refinancing
• High prepayment penalties
• Lack of full disclosure of rates and fees

If you encounter these red flags, look elsewhere for small business funding!

Qualify for a Small Business Loan Faster

According to QuickBooks, 64% of small businesses are able to get started with $10,000 or less. You don’t need a bank for a huge loan if you’re looking to get your business off the ground, cover routine expenses or make some changes to spur growth.

While loans of this size may not be lucrative for banks, alternative lenders like National Business Capital are ready to help you find the best financing options for a business in your industry.

To qualify for most of the small business loan options at National, you don’t need a minimum FICO score or a long business history.

If you’re making $120,000 or more in annual sales and have been operating for at least three months, you may be eligible to receive funding in just a few days. Startup owners with FICO scores of 620 or more may qualify for funding regardless of sales history or time in business.

Whether you’ve tried to apply for business funding with bad credit and been turned down or you’re itching to transform your startup idea into a viable company, National Business Capital can work with you to find the appropriate type of funding with terms and rates that fit your budget.