If you own a small business or want to start one, you might find yourself a bit short of funds. You could consider taking out a bank loan or getting a business credit card, but these days, you can also look to alternative lending as a way to borrow money to get or keep your business up and running.
What Is Alternative Lending?
On the most basic level, alternative lending refers to lending and borrowing activities that take place apart from a traditional bank or credit union. Also called peer-to-peer or marketplace lending, alternative lending links business owners with investors so business owners can get the funds they need in a flexible, efficient way. Most alternative lending is transacted online by companies that specialize in this new trend and that use the latest technology to streamline the lending process.
What Are the Types of Alternative Lending?
Alternative lending companies generally offer four types of alternative lending (although this varies by company). A line of credit allows a borrower to draw money up to a maximum amount over a set period of time. When the borrower pays back the money, he or she can borrow it again until the draw period runs out. Invoice factoring calculates a short-term advance based on a business’s accounts receivable (money customers owe). When the customers pay, the business repays the borrowed funds. With a term loan, a business can borrow a particular amount of money for a particular time period. Finally, a merchant cash advance is a quick loan that is paid back through a portion of the business’ sales.
What Are the Benefits of Alternative Lending?
Alternative lending offers several key benefits. First, it is much faster than traditional lending with less paperwork and an easier, smoother application process. Businesses are also more likely to get approved by an alternative lender than by a traditional bank or credit union, which sets the bar for approval much higher. Alternative lenders are also more flexible in terms and loan amounts, allowing businesses to borrow what they need when they need it.
What Are the Risks of Alternative Lending?
Alternative lending is not without risks, however. Borrowers may have to pay back their debts in a shorter period of time, and this can lead to higher payments. Also, interest rates for alternative lenders can at times be higher than interest rates for traditional loans.
With these considerations in mind, you can determine if alternative lending is right for your business.