Whether it is a matter of launching a business or growing one, securing financing would always be a crucial factor – especially for first-time business owners. While there can be a problem of plenty, it is important to sift through all the small business lending options available to select the one that aligns with your business goals.
The go-to choices for most entrepreneurs are the traditional small business lending options, such as bank loans or term loans. But they can be difficult to access, especially for startups or new enterprises with limited credit history or collateral. Fortunately, there are alternative small business lending options available that are designed for businesses needing urgent capital or do not qualify for traditional loans. These options include merchant cash advances, crowdfunding and peer-to-peer lending.
The Rise of Alternative Small Business Lending
The past decade has seen a substantial development in the small business lending landscape. While traditional lending institutions like the banks have made their funding requirements tighter, more flexible financing options have come up to provide businesses with alternative options to access the funds they need. Offering faster approval processes, lenient qualification criteria and flexible repayment structures, these funding options have given a lifeline to enterprises, especially first-time applicants to get loans which were not possible before. Here’s a glimpse of three popular alternative lending solutions that are in the market now:
1. Merchant Cash Advances (MCA)
A merchant cash advance (MCA) is an alternative financing option offers a large amount of cash up front to a business in return for a percentage of future credit or debit card sales. These loans are suitable for those businesses that experience high credit card sales but variable income. But in comparison to traditional business loans, a merchant loan (MCA loan) is not a loan. It is an advance given on future sales, making it perfect for businesses with poor credit.
But how does it work? When a borrower receives a merchant cash advance, he agrees to pay the lender a fixed percentage of his daily credit card sales in exchange for a hefty amount of cash up front. This repayment cycle continues till the cash advance along with any fees/charges is repaid in full. Keep in mind that the fees in this type of funding option are usually steep. So, the repayment amount is almost always significantly more than what was borrowed.
2. Crowdfunding
In this type of funding, business owners raise money by getting small funds from a large amount of people, usually through crowdfunding platforms like Kickstart or GoFundMe. Successful crowdfunding happens with startups offering innovative products or those with strong community support. Although there is nothing is guaranteed by the company in exchange for the funding, but in most cases, backers may get rewards, early access to products or even in some cases, company’s equity.
3. Peer-to-Peer Lending (P2P)
Online platforms like LendingClub and Prosper offers peer-to-peer lending (P2P) by allowing borrowers connect with individual lenders directly. Acting as intermediaries, these platforms provide P2P loans which are essentially unsecured loans. It means these loans do not require collateral to secure funding and the interest rates vary, depending on the borrower’s credit score.
How Are Alternative Lending Options Different from Small Business Lending?
For most first-time borrowers, alternative lending options are different than traditional small business lending options in following cases:
- Speed: Traditional small business lending options often have a tedious application process that can take weeks and sometimes, even months. On the other hand, alternative loans like MCAs and P2P loans are popular for their fast turnaround process and can provide funding in a few days.
- Qualification: The requirement criteria for small businesses while trying to obtain traditional business loans is generally tough. Lenders look for an established business credit score or a strong revenue history. Alternative funding options generally come with less stringent requirements, making them more accessible to new businesses.
- Flexibility: Alternative funding options have more flexible repayment structures than traditional loans, especially with MCAs, where payments fluctuate with revenue as most businesses that generally opt for this type of funding have unpredictable cash flow.
But businesses need to know that though alternative lending options offer flexibility and convenience, it come at a higher cost, in terms of interest rates and fees. This can make the overall cost of the loan much higher. First-time applicants need to consider the long-term financial effect before choosing an alternative loan option.
Conclusion
Traditional small business lending options can be difficult to access, especially for first-time business owners and applicants. In such situations, alternative funding options like merchant cash advances, P2P loans and crowdfunding can provide a much-needed opportunity to get the funding they need to meet their business needs. Each option comes with its own benefits and drawbacks, but it is important that applicants understand the impact of these loans and their own capabilities to meet the repayments before deciding on one option. Because wrong funding can put undue burden on a business’s financial health.
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