When you run a small business in any industry of any country, raising extra capital for your business becomes an eventuality. The United States of America is home to almost 29 million small businesses that add valuable GDP, employment and capital to the economy. In order to sustain this rapidly growing base of small businesses in the country, multiple systems have been introduced that allow business owners to acquire small business loans with ease and efficiency.
Especially in the last decade, alternative lenders have taken the industry of business lending by storm with their versatile and numerous financing options. More small businesses can acquire a loan today than ever before in history of the country, mostly due to the expanded number and option of loans provided today.
Let us take a look at why and how alternative lending has achieved so much success and popularity in such a short period of time and what are the emerging alternative loan options you need to know about to ensure the long term financing for your small business.
What is Alternative Lending?
Alternative lending is essentially all the lending options available to business owners outside of conventional loans provided by financial institutes. This means all loans provided or endorsed by banks and the Small Business Administration (SBA) branch are excluded from this category. Instead, these loans are provided by private lenders and include, among other options, business credit cards, business line of credit, invoice financing and equipment financing etc.
Why is Alternative Lending Popular?
Alternative lenders provide a unique opportunity to business owners to find funding for their business even after being rejected for a business loan from a bank.
Here are just some of the reasons why most business owners today look to alternative lending as their go to option:
- Alternative loans are approved much more quickly as compared to conventional bank loans. This means business owners do not have to wait for funding to flow in months after applying for a business loan but instead due to application processing time as less as a few days, they can access it immediately.
- Alternative loans are easier to acquire as compared to conventional and SBA loans. They ask for a lower credit score as well as lower annual revenue and allow businesses as new as 3 to 4 months old to apply for small business loans.
- With online lending platforms such as Orumfy, it is much easier to apply for and acquire alternative loans. Such lending platforms allow lenders to check the credibility of borrowers and allow borrowers to verify the authenticity of the lenders, ultimately making the loan acquiring process smoother and more transparent.
Emerging Alternative Loan Options
Alternative loan options such as equipment financing and Peer to Peer (P2P) lending have been around for a while. However, newer and more flexible lending options are becoming available as the needs of the small businesses in the United States are changing and evolving.
Let us take a look at some of the new alternative lending options in the market today:
Merchant Cash Advance:
This loan is a good option for any business looking to get immediate inflow of cash. MCA allows you to get a loan in exchange for ensuring the lender a certain percentage of your daily credit or debit card sales. Although this may be a quick way to get funding, yet it may hamper profits by directing a big chunk of earnings to the lender in peak season sales. Another potentially detrimental factor while opting for the MCA is the interest rate which is usually in the range of 20%, due to the immediate short term financing (generally for 90 days) provided by this loan option.
Factoring is similar to Merchant Cash Advance in the sense that it provides quick financing to companies that have failed to acquire conventional bank loans, and do not have an outstanding credit score. However unlike MCA, factoring loan option decides to give out loans by assessing not the company’s own credit health but its client’s credit health. This allows the business itself to pass on its pending client payments to the lender who pays the business for almost 90% of the client’s outstanding payments and later on reimburses itself by the client’s payment. The profit margin arises from the processing fee tagged by the lender to the business.
Revenue Based Loans:
Revenue Based Financing (RBF) is an innovation in the classical lending system where the borrower pays a set amount for a set amount of time in exchange for a loan. Instead, RBF works by charging the borrower a set percentage of their revenue which is limited by a “cap” that can be up to 1.25x of the total revenue for the short term. Of course, RBF lenders look for businesses with a healthy profit margin, solid business plan and reliable revenue streams.
Such alternative loan options have allowed more businesses to acquire loans more loans with ease. If you need capital for your business, then consider going for some of these novel alternative loan options.