Rather than turning to traditional banks for loans, more and more small business owners are looking toward online alternative lenders to get the money they need for their small businesses. Even though lending to businesses has somewhat improved since the peak of the recession, it’s still extremely difficult for small businesses to get funding from banks, so alternative lenders have stepped in to fill that gap.
If you’re considering alternative lending as a way to get funding for your small business, but have never used it before, here are a few important things you should know before getting started:
Funds Can Be Used for Several Purposes
When you apply for a loan for your small business from the bank, you’ll be asked to tell them exactly what you need the money for and the bank may not approve your loan if you’re not using it for certain purposes. Alternative lenders are much more flexible about how you can use the funds.
Funds from alternative lenders can be used to hire more staff, purchase more inventory or equipment, develop new products, remodel or make repairs to your storefront or office, pay existing employees, and much more.
Some Types of Alternative Lending Aren’t Actually Loans
Alternative lenders typically offer several ways to get funding for your business. In addition to loans, some lenders also offer things like merchant cash advances (MCAs) and accounts receivable financing, which aren’t actually loans. If you’ve had problems getting loans because of a damaged credit score, these might be an option for you since your credit score will be less of a factor.
With accounts receivable financing, you sell your outstanding invoices to a financing company at a discount, and instead of paying you, your customers then pay the financing company. With MCAs, a business sells a portion of their future receivables to a financing company. Most financing companies only offer MCAs for future credit/debit card sales, but some companies also offer MCAs for other types of receivables like cash deposits. MCAs are then repaid by the lender collecting a portion of the receivables until the amount of the advance has been paid back with interest. Both MCAs and accounts receivable financing are considered transactions, not loans.
Alternative Lending is Easier to Apply for Than a Bank Loan
One of the biggest reasons alternative lenders have become so popular with small business owners is that alternative lenders make it so easy to apply for funding. They don’t require business owners to spend hours upon hours filling out complicated paperwork before making them wait weeks to find out whether or not they’ve been approved. Instead, alternative lenders have easy online application processes and applicants will be approved in a matter of days, or in some cases, in as soon as 24 hours.
Alternative Lenders Tend to Offer Shorter Terms and Smaller Loans
When you get a loan from a bank, you’ll likely be stuck paying it off for years to come. Alternative lenders often offer short-term options that are meant to be paid off within 18 months or less. So if you need money to get past what you know will be a very temporary setback, some business owners prefer being able have their debt squared away as soon as possible.
Alternative lenders also tend to offer loans in smaller amounts than banks do, but that’s okay because one reason so many small businesses have a hard time getting loans from banks is because they aren’t seeking loans large enough for banks to be interested. According to the Harvard Business School, 39% of small business owners were seeking loans for $50,000 or less in 2014.
The Fees Can Be Higher Than Bank Loans
The biggest criticism many people have of alternative lenders is that alternative lenders typically have higher fees than you’d get with a bank for a loan in the same amount. But it’s important to remember that banks can afford to offer lower fees and interest rates because they stand to profit more in the long run since their loans tend to have longer terms.