Alternative Lending: The Benefit to Small Business Owners
Opening a business can be exciting, but it is important to know what steps to take when starting out. You may consider the complications of securing a lease in a building, as well as the cost of the supplies, equipment and other necessities for your business. Only rarely do new business owners have the capital to immediately start up their venture. Bank loans are the traditional way to get the funding you need to open your company, but it can be difficult, especially for first-time business owners, to be approved for a new commercial loan. You may have more success with alternative lending. In fact, even some established companies still rely on this method.
Types of Alternative or Online Financing
There are a few alternatives to bank loans you may take into account. A line of credit could be an option if you needed a certain amount of cash on hand to use when necessary – for example, an emergency fund to cover unexpected repairs or overhead costs. A merchant cash advance allows you to obtain funds prior to your customers making purchases, based on how much you anticipate to sell. Invoice factoring would get you an advance payment of your clients’ invoices, which you would then repay to the lender after your customers pay you. Finally, a term loan is a business loan that you would repay within four to five years. A term loan is the most popular and often least expensive type of alternative lending.
Advantages of Alternative Financing
Banks are often not willing to risk lending to a small or first-time business owner, especially if you have non-existent or bad credit. On the other hand, alternative financing companies are known for being more willing to lend to startups and are often more flexible with their terms. You could wait weeks or months to be approved for a traditional business loan from a bank, but you may have to wait only a few days to be approved with an alternative lender, as well as having several options to choose from. It is important to fully understand your options before choosing an alternative loan type, because interest rates can be significantly higher with shorter loan terms.
In the past, new business owners’ options were limited to gaining approval from the bank or having the cash on hand. Today, alternative lending can be an effective way to improve your business’s credit and give you greater flexibility and increased options to build your company.