Alternative Business Loans May Work When Conventional Financing Doesn’t
Alternative business loans can be great when a conventional bank loan isn’t flexible enough or won’t come through fast enough. Alternative business loans are generally also easier to qualify for. But that flexibility, speed and ease come with a cost. Alternative loans typically cost more than a bank or Small Business Administration (SBA) loan.
Alternative Business Loans vs. Conventional Loans
According to a survey by the Federal Reserve, large banks turn down about one-third of business loan applications outright. Nearly half of applicants don’t get the full amount they asked for. SBA loans are easier to qualify for and often offer lower terms. But the approval process can take anywhere from 30 to 90 days.
On the other hand, alternative financing options can be the answer if you need money right away. If your revenue is seasonal, or comes in lumps, alternative loans can work with that.
Different Types of Alternative Business Loans
- Revenue-Based Financing: Repayment of the loan flexes with your monthly revenue. You take a fixed amount upfront, repay a fixed multiple, and the percentage of revenue used to repay is set when the deal closes.
- Online Term Loan: Applicants go through an online bank, generally taking mere minutes to apply. Decisions come back within hours or days. Borrowers get a fixed amount to repaid in fixed instalments over a specified period. Rates are usually higher than at brick-and-mortar banks.
- Business Line of Credit: A revolving account you draw from as you need cash and repay as you go. A business line of credit works best for businesses needing help with ongoing needs for their cash flow.
- Merchant Cash Advance: Borrowers receive a lump sum and repay with a daily holdback against future sales. This is figured with a factor rate rather than a regular percentage rate, which can be costly. MCAs are usually quickly approved and financed, but best used for a specific bridge need, like stocking up on inventory for a big marketing push.
- Invoice Factoring: Businesses sell their unpaid invoices to a company at a discount, getting some cash upfront and the rest when the customer pays the invoice. Approval for this type of financing depends on the customer’s quality of credit rather than yours.
Again, conventional loans are most likely going to be cheaper. If you have good credit and are a well-established business with collateral, you probably want to go with a bank. That is, if you can afford to wait a month or more.
Links
The US Chamber of Commerce offers an additional explanation of alternative business lending.
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