If you have a small business and need a loan, then you’ve probably approached the bank and been rejected to boot. When traditional options let you down, it’s time to turn to the alternative.
Alternative forms of lending from institutions without a banking license are becoming more common. Lenders often take the form of credit unions and crowdfunding, with lenders choosing what projects they want to invest in!
Alternative financing is an attractive option because it is faster, cheaper, and more accessible. But is there more to it?
What is Alternative Lending?
A traditional bank loan isn’t the only option for borrowers. The rise of alternative lending has ensured that small business owners and other such categories ignored by traditional banks have a source of money.
It’s an online marketplace that connects loan investors and borrowers, taking away the need for most traditional methods of approving a loan.
As it evolved, alternative lenders turned towards loans like student loans, commercial and residential real estate, receivables, and other forms of specialty finance.
Alternative Lenders – Types
Despite not having a banking license, alternative lenders are still legally allowed to lend out money. These lenders often take the form of:
- Community Development Financial Institutions (CDFI)
- Credit Unions
- Microlenders
- Crowdfunding
- P2P (Peer-to-peer) lenders
- Marketplace lending
- FinTechs
Why Choose an Alternative Lender?
When traditional banks are a perfectly viable choice, why would you opt for alternative lending? Is it bound to be riskier than a traditional bank loan?
Simplicity
All alternative financing starts on online platforms. You fill out an online application with all the details for an unsecured loan! These loans don’t require an asset as collateral but have an interest rate to compensate.
The interest rates in alternative financing are often higher, ranging anywhere between 5% to 13%. But, since the loan is short term, the interest amount isn’t that high.
Speed
If you’re looking for a loan quickly, then alternative financing is a better option. Since it functions online rather than through paper and requires different, if not fewer, steps – the process of approval is much faster.
The lenders approve loan applications faster, and the funds get deposited into your account within days of the approval.
High Approval Rate
According to the 2015 Wall Street Journal report, traditional banks reduced the provisions provided to small business owners by almost 38%. These small business owners have to turn to unconventional methods like alternative lenders to get the loan they’re after.
Alternative lenders are more likely to approve loans that traditional banks choose to not. This makes them a more attractive option despite the higher interest rates and shorter periods.
Flexibility
Unlike traditional banks, alternative financing operates much more flexibly. Repayment terms are usually flexible depending on the lender, time, loan amount, and a few other factors. For example, some lenders might offer a daily repayment option for better cash-flow management.
Some lenders even adjust for business seasonality! So, depending on what the business requires, alternative lenders adapt the repayment terms.
Wrapping Up
Alternative lenders fill in the gap that traditional banks and their lending models left. Small businesses and other specialty finance options get a greater opportunity to grow with alternative options such as crowdfunding and peer to peer lending.
With the flexibility of payment, easy applications, paperless process, and speed – alternative financing is the best option for anybody looking to grow!