Business loan with alternative lending
Choosing a business loan with alternative lending makes it possible for small businesses to get the financing they need to succeed. Learn more about the various loan options and how you can get a business loan with alternative lending in this article.
A need for alternative financing
There’s no denying that small businesses are an essential component to any thriving community. However, as the financial state of the economy expands and contracts, both new and well-established businesses may need a little extra working capital to curb the seasonal slow-downs and trough phases of its business cycle. Oftentimes, conventional bank loans require in-person visits and lengthy application processes that can take weeks or months to complete without any guarantee of approval. For this reason, small businesses are increasingly seeking the flexibly and ease of a business loan with alternative lending.
Recent data from the Small Business Administration (SBA) finds that small businesses represent 99 percent of U.S. companies and 54 percent of total sales. They’re also a large source of employment. Since 1990, small business enterprises have added 8 million new jobs, accounting for 55 percent of all jobs. The small business may be “small,” but it has a big role to play in economic growth and unemployment rates.
However, that position chiefly depends on access to a reliable source of working capital.
Working Capital: funds used in day-to-day operations. The amount is calculated by subtracting current liabilities from current assets.
The good news is that there are many alternative lending options for small businesses that can help maintain revenue and keep unemployment rates to a minimum.
Small business lending 101
The 2008 financial crisis changed everything for small business financing. Many community banks were consolidated, leaving small businesses with fewer, local lending options. Large banks drastically reduced or eliminated small business loans below a certain threshold because of depreciating profit margins.
And, while government regulations didn’t actually become more stringent post-recession, they often seem that way. Federal involvement and oversight have increased since 2008. For many banks, the increased regulatory compliance makes small business lending much too expensive and labor-intensive to be considered a worthwhile activity.
The State of Small Business Lending report from Harvard Business Review paints an equally bleak picture.
- Small business loans on banks’ balance sheets are down about 20 percent since 2008, while loans to larger businesses have risen by about 4 percent over the same time period.
- The percentage of small business loans of total bank loans rested around 50 percent in 1995. The number has steadily declined, accounting for approximately 30 percent of total bank loans in 2012.
- Small business owners report that competition among banks for their business peaked between 2001 and 2006 and has sharply waned since.
Banks’ responses to the crisis are unsurprising. Small business loans have always posed a risk, but decreased profit margins and increased regulatory compliance makes it more acute.
The statement, while true, is of little comfort to small businesses. They require working capital to get and keep their businesses off the ground.
Fortunately, alternative lenders, like Rapid Finance, have formed to fill the need. They offer financing products such as lines of credit and small business loans—without the red tape.
What is alternative lending?
Alternative lending refers to the lending practice that takes place outside of traditional banking institutions. Alternative lender’s ability to utilize technology and provide excellent lending services has allowed them to better serve small businesses seeking flexible loan options.
Alternative lenders, like Rapid Finance, focus on excellent client experiences. If small business owners were frustrated with how they were being treated by a large bank, alternative lenders would offer a different experience that featured simplified application processes, faster underwriting decisions, and quick funding.
The results speak for themselves. While traditional bank lending (52 percent for small banks and 42 percent for large) remains the primary source of financing today, online lending is the second (20 percent). The percentage grows markedly as the loan amount gets smaller. Micro-loans, i.e., less than $100,000, provided by an alternative lender take 30 percent of the market. They are only slightly eclipsed by small and large banks, at 44 and 41 percent respectively.
Pros and cons of alternative lending
In order to determine whether a business loan with alternative lending is right for your business, it’s important to weigh the advantages and disadvantages of choosing non-bank financing.
Alternative Lending Pros:
- Quick and easy application process
Most alternative lenders provide a streamlined loan application process, which typically takes place online or over the phone. To complete the application, you’ll need to submit basic business information as well as some financial data. If you have the proper information on hand, the application can take as little as 15 minutes to complete.
- Funds can be in your account within one business day
Traditional lenders typically need weeks or months to process an application and deposit funding. However, with alternative financing, once your application request has been approved, your requested loan amount can process and appear in your business bank account in as little as one business day – providing you with the working capital you need when you need it most.
- You can still be eligible with subpar credit
Alternative lenders typically have flexible borrower requirements, which allows businesses owners with no or subpar credit history a chance to secure a business loan. Traditional bank financing typically requires you to provide a sufficient credit score in order to be eligible.
Alternative Lending Cons:
- You may not get a discount if you repay your loan early
Traditional banks may provide benefits or discounts to those who repay their loan before the statement is due. However, you may not get the same benefit from an alternative lender.
- Potentially shorter terms
A lot of alternative funders offer business loans or lines of credit with much shorter terms than traditional bank loans. Typically the terms will range from 3 months up to 18 months compared to a traditional bank loan, which can have terms up to 20 years.
Types of small business loans available
A business loan with an alternative lender offers a number of flexible financing options for small businesses. Here are a few loan options to consider if you’re looking for non-traditional funding:
- Term loans: A term loan provides access to the working capital you need upfront and then pay it off daily, weekly, or sometimes monthly depending upon the lifespan of the loan. Typically, term loans provide lower rates than other loan options, but lenders may require proof of positive business history or collateral in order to qualify.
- Line of credit: A line of credit is a flexible funding option that provides your company access to working capital on a need-to basis. Your business will be approved for a set amount of credit which then allows the business to draw on that amount only when needed, paying any fees on the balance you owe as you go.
- Asset based loan: Asset-based financing is a specialized method of providing companies with working capital by using assets such as accounts receivable, inventory, machinery, equipment, or real estate as collateral to secure the loan. Asset-based finance lenders tend to favor liquid collateral that can be turned into cash in the event you default on a loan payment. This kind of loan will require a strong business plan proposal or proof of company revenue in order to ensure you and your company will be able to meet payments.
Applying with an alternative lender
Applying for a business loan with an alternative lender is actually quite simple. Before applying, make sure that you have your driver’s license, business tax ID (EIN), business bank account information, and three months of bank statements handy as you will need them to complete your loan application. You can then view the lending options your business may qualify for online. Once submitted, your application will be reviewed by an underwriting team who will provide you with a response in as little as 24 hours. Upon approval, your requested loan amount will be sent to the business account you put on file, accessible and ready to use.
Alternative lending FAQs
What are the requirements for a small business loan?
Traditional lenders are often highly selective when reviewing small business funding applications and will typically make their approval decision based on your business credit score and credit history alone. Alternative lenders will look at your business as a whole, reviewing more than just your credit score. Most small business alternative lenders will require you to provide a state issued license, your business tax ID, and three months of bank statements. Depending on the loan and the maturation stage of your company, you may also be required to submit a business plan that indicates a forecast of financial projections such as sales and profits.
Can I get a small business loan with bad credit?
While the majority of small business lenders use credit score as a substantial factor when considering application approval, alternative lenders take the overall performance of the business into account by looking at business revenue, time in business, and accounts receivable.
Where can I find a small business financing calculator?
Rapid Finance offers a small business financing calculator that can help you determine the affordability of a small business loan before you even apply. This tool allows you to select your desired working capital amount, input your credit score, and your business’s monthly sales to see what your small business may qualify for.
Click here to access the Rapid Finance small business financing calculator.
Alternative lending’s numbers will continue to increase over the next few years. Business Insider reports that alternative small business lenders originated $5 billion and had a 4.3 percent share of the small business lending market in 2015. In a report from the Cambridge Centre for Alternative Finance, generalized alternative financing—they include online donations and equity-financed crowdfunding—grew from $11 billion in 2014 to $36 billion in 2015.
So, whether you’re looking to scale your business or offset seasonal expenses, pursuing a business loan with alternative lending can help you get the right-sized capital you need to keep daily operations steady.
If you have any questions or would like to speak with a business advisor about the various alternative lending options available to you, call one of our small business experts at Rapid Finance today: (877)-252-0827.