According to The Balance Small Business, commercial banks – like Citicorp, Wells Fargo and Bank of America – consider startup funding one of the riskiest types of loans. For this reason, many entrepreneurs have to secure their funding for startups through other sources.
At Associates Home Loan, a lender who provides lower-interest loans to small business owners, we get a lot of questions from small business owners about alternative lending sources. The following provides an explanation of what alternative credit is as well as its advantages for the small business owner.
Alternative Lending Defined
Alternative credit means a credit that did not come from the major commercial banks. In the past, anyone who wanted a business loan had to either obtain one through the Small Business Administration’s programs or through a commercial bank. When the Great Recession hit a decade ago, the banks closed the taps on almost all lending, especially to small business startups.
When Did Alternative Lending Take Off?
Before 2009, there was no need for much of any alternative lending, except for venture capital lending. Once the Great Recession was in full swing, even more people would have been laid off and joined the ranks of the walking homeless had alternative lending sources not sprung up to provide loans for deserving businesses.
What Types of Alternative Lending Sources Exist for Small Business Owners:
Small Business Administration Guaranteed Loan Program
The SBA has a program where they look very deeply at all aspects of your business and then make a determination if they are willing to guarantee you an SBA loan. There is a lot of paperwork but such a loan is worth its weight in gold for a startup.
Vendor Credit
You can build up your business credit if you can secure financing for your inventory, products or materials that you buy through a vendor.
Seller Financing
Another alternative source of credit is seller financing when you purchase your business. The seller may just extend you credit to buy your business, or they may accept payments from your earnings.
Purchase Order Financing
Some alternative lenders will provide you funds to get a product from a purchase order manufactured and then will take a percentage of the loan’s proceeds in fees.
Peer-to-Peer Lending
According to Investopedia, businesses seeking peer-to-peer lending will go on peer-to-peer lending websites. They will create a lending profile to demonstrate their creditworthiness and state the loan amount and interest rate desired. Then, private lenders compete to be the loan provider.
Merchant Cash Advance
The lending arrangement with a merchant cash advance is that you will be advanced a loan and will pay it off of the top of your daily credit card receipts. The interest rate on such loans tends to be somewhat higher compared to other alternative lending options.
Using Your Credit Card to Finance Your Business
The Balance Small Business cautions business owners that credit cards should be a last resort when financing your startup. Business credit cards today carry an interest rate on average of over 15 percent. This becomes a huge hole for many businesses. Owners often cannot dig their company out of debt when they try to service those high-interest payments. They just end up paying mostly interest each month and are able to do little to pay down the principal. This harms the cash flow of your business. Also, if you get behind in the payments, your personal credit will suffer.
Other Alternative Lending Sources
Today, there are lenders who specialize in helping small businesses with their credit needs that are more likely to approve loans to business owners that might not have a track record but have good credit. These loans usually have a term of a few years and lower interest rates.
How Can Alternative Lending Sources Benefit My Business?
Less Paperwork is Required
Alternative lenders usually do not want to see business plans nor your bank records for the past few years, as commercial banks do. Instead, they are interested in your credit score and your income.
Quick Approval Process
Often, you will be approved or denied for the loan the same day you apply. The money usually comes the very next day.
Greater Chances of Approval
Alternative lenders are looking more at a credit score and income. They approve loans for a far greater portion of applicants.
As you can see, alternative credit provides many options for business owners to get some additional cash flow at crucial junctures in the business cycle. They usually have fast approval processes that are more likely to lead to a “yes.” There is less paperwork to submit.
For small businesses without much of a track record, alternative lenders provide a means that allow owners to get infusions of much-needed cash. Call us at Associates Home Loan, if you would like to pursue an alternative business loan.
This is an article provided by our partners network. It does not reflect the views or opinions of our editorial team and management.
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Founder Dinis Guarda
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