If you have a new business, you understand the challenges of financing your operations using traditional lending institutions, such as banks or credit unions. However, you may need loans for key growth strategies, balancing cash flows, purchasing equipment, etc. Therefore, you need financing options that are outside traditional banks. If you pursue financing outside a traditional bank, you are pursuing alternative lending. These are a few things you should know about this type of financing.

Types of Alternative Lenders

Several direct online lenders offer loans to small business owners. These financiers offer asset-backed and future receivable loans. You may also contact private lenders who finance loans using their personal or business funds. Crowdfunding is common for startup companies. You simply provide equity in your company or some kind of reward for the money you receive. Crowdfunding gives you access to a large group of investors. Finally, marketplace lenders are connected to small businesses through technological platforms.

Advantages

Alternative financing options offer fewer requirements than traditional lenders. For example, they provide most loan value, whereas the SBA or banks have loan minimums. In addition, you can gain financing even if you have a new business, but banks require at least two years of success. High-risk industries also have difficulty gaining traditional loans but not from alternative lending markets. Your credit rating and that of your company may disqualify you for traditional loans but not for alternative options.

The application and underwriting processes are much simpler, more streamlined than traditional lending as well. You can gain approval and funding within 24 hours through alternative finance markets. In addition, you can use the funds you receive for anything, such as purchasing equipment, paying salaries, managing cash flow, etc.

Things To Consider

Because they operate outside traditional banks and often provide higher-risk loans, many alternative financing options have higher interest rates and fees. For example, your company’s health, credit, assets, and cash flows will all impact how expensive your financing is. In addition, you may pay a factor rate rather than an interest rate. Factor rates are decimal amounts that your loan is multiplied by. For example, if you seek a $10,000 loan and your factor rate is 1.2, you will end up paying $12,000 for the loan.

These loans also have shorter payback periods and may require more frequent payments. This means that your payments may be higher than a traditional loan, and you may have to make weekly or daily payments. For example, merchant cash advances require a daily payment that is automatically deducted from your credit card receipts.

If your company is new or hasn’t built its credit, alternative lending may be a great option, but do your due diligence to ensure you are getting the best deal.