Many individuals and businesses require additional capital and are not aware of the many alternative lending options on the market today and have been turned down by traditional Bank lenders. In fact, in October 2012, bank lenders receive a record-low of 14.8 percent of requests for small business loans.
Since many people and startups are frustrated by bank lenders and come to Alternative lenders to find a solution, it is a great time to shed some light on the continually growing alternative lending industry.
What is alternative lending?
Alternative lending is one of the broad term used to describe the full range of credit options offered outside a traditional bank loan to consumers and entrepreneurs. These alternatives most often used when a person or company owner for many reasons cannot obtain a conventional bank loan.
Alternative lenders specialized in the use of overlooked collateral sources such as properties or even outstanding invoices to secure the loan. Typically, they have much greater flexibility to provide cash than the banks when it is a question of repayment schedules and loan approval.
This industry is well-established, and generally, respected members of the financial services community are employed in the alternative lending industry.
Fill The Gap for Individual & SMB Everywhere
While alternative loans may sometimes have more interest-rate than traditional bank loans, they fill up some gap for individual and small enterprise everywhere, giving cash flow funding that is so important to cash-strapped companies that have been unable to obtain a credit or loan from traditional banks. Every reputable alternative lender will discuss the best lending program for your company in detail with you.
Types of Alternative Lending Models
When we look at alternative lending as a whole, it is, in fact, a complex ecosystem composed of eight types of alternative lending model. They are:
P2P lending is currently one of the best-known examples. A large number of companies operate successfully to democratize lending. P2P lending is constructed as a market where people receive unsecured loans from other people.
The model enables people to access fast, cheap loans at an affordable rate.
Reward-based crowdfunding allows Cross-companies and individuals to make early-stage investments, sell products, gain market validation and social evidence, develop a multi-source concept, engage customers, build loyal communities.
The Reward-based crowdfunding started from Europe, but went much further and got adopted across continents.
B2B lending is similar to P2P loans but aimed at companies. It allows SMEs from a range of online (individual and institutional) investors to receive the necessary growth funding. The real advantage of this system is that it enables businesses to cut down on time-consuming and complicated paperwork, such as banks process.
Also, B2B lending offers competitive rates and funding terms together with transparency and ease of use, just like P2P lending.
Equity-based Crowdfunding is one of the rapidly growing models. It allows startups and entrepreneurs to raise early-stage working capital directly mostly from angel investors, individual investors, and VCs in for equity in the company.
This lending model has a significant impact on business-to-business cross-border relationships as investors can access business abroad and oversee foreign business operations from the inside.
Microfinance and Community shares
This alternative lending model tends to focus on empowering small and medium-sized enterprises through local community participation.
Social institutions and community-based organizations can utilize local social networks for a “good cause” or fuel a small local business and sometimes to support a particular community (such as female entrepreneurs).
Microfinance enterprises are generally committed to supporting small business owners that do not qualify for a bank loan in their communities.
This model, which is already one of the rapidly growing funding sources, allows funders to support humanitarian or social causes or civic projects without material or financial returns.
Invoice trading is an entirely new area where small business has been able to sell their invoices or receivables at a discount for working capital to many individual or institutional investors. Financing platforms such as supply chain can also include in this category.
Although, this system is still new but already operated by a few companies.
This model allows long-term investments and primarily focused on clean energy firms (for example, financing wind farms or installations of solar panels). With increasing concern about natural resources and growing interest in renewable energy sources, this lending model has tremendous potential to be among some of the world’s hottest.
“Green” tech firms are gaining recognition and momentum and will require considerable allocation of resources in the coming years to impact countries around the globe.
The list of existing models and firms is indeed not exhaustive; creative innovators always come up with new ideas about how businesses, communities around the world or individual aspirations can be financed.
In the coming years, as the lending business is changing all the time, we may see a significant growth of other alternative lending models with very promising representatives.
Traditional Bank vs. Alternative Lender
You probably want to borrow money to help your business grow or thrive. Where you are planning to get this money is a big issue. Traditional banks and alternative lenders each offer their benefits and disadvantages. The differences, in general, can be divided into five areas:
Banks tend to provide loan for small business with the lowest interest rates because they have access to a considerable capital pool. But banks can, however, make a lot of money from a wide variety of products, such as credit card transactions, checking or merchant services, so they don’t need to focus on lending margins as much as possible.
While on the other hand, alternative lenders may need to draw more on their funds, commonly from credit facilities or investors, including banks, to issue new loans that raise their interest rates and borrowing costs.
While various online lenders seem to have lower operating costs because they don’t have to manage local branches, overall interest rates tend to be higher than what a traditional bank can find.
It can be a long and complicated process to apply for a loan from a traditional bank. You might have to plan a phone call and then go to the nearest bank branch to start discussing the application and your qualifications in person after collecting and submitting your documents.
Hearing back from the bank might take three to four weeks, and even longer to get the funds.
Many alternative lenders have streamlined the application and approval process. You can get everything submitted online, and connect your financial reporting or invoicing software to make it possible for the lender to examine your business and hear back fairly quickly.
If the lender approves your application, it may also be able to transfer the funds within the next few days or speed up the delivery, and you will receive it the very same day.
Costs and fees
When comparing financing options and lenders, you may end up facing a variety of potential charges. Some are quite common especially, such as applications fee (the money you paid to apply regardless of the decision).
Others also, including origination fees (either a fixed fee or a percentage of the amount), are quite standard, although you’ll find out that other lenders don’t charge them if you shop around.
An alternative lender with higher interest rate will be inexpensive to approach for a loan. Whereas the banks generally require upfront costs without the guarantee of being approved.
Whether you are trying to open a credit line or apply for a term loan, you have to go through the underwriting process of a lender and get reviewed and approved. Bank loans might have stricter requirements than other alternative lenders.
Many banks, for example, will only consider lending to companies which have been operating for at least two years. You might also be asked to submit a formal business plan, have an excellent personal credit score, and demonstrate that your business has real assets to qualify (such as supplies, equipment, or invoices).
Alternative lenders often provide a full range of business owners with capital. A minimum credit score may be required, but it is usually considerably lower than the mandatory requirement of the bank. Also, alternative lenders may not probably ask for a business plan and expect you to have been in business for some months.
Perhaps one of the notable differences between a bank loan and an alternative lender is that banks often generally require the loan to be secured, while alternative lenders are much more open to providing unsecured loans.
For a couple of reasons, banks will rarely give unsecured financing to small businesses, ranging from loan size to regulatory restrictions, approval processes or lending limits to risk. And even though they provide an unsecured loan, it can often turn into a drawn-out process that does not serve the immediate needs of business growth.
Access to low-cost deposit funds by banks means they may sometimes provide lower-cost finance. Heavy stipulations imposed by banks, however, indicate a massive hit to the degree of certainty that comes with that funding. Banks often have very low unsecured loan limits, forcing SMEs to look somewhere else.
There are cases where individual or business borrowers don’t get enough, and the unsecured limits they get out of a bank are meager, like $ 5,000 or $ 15,000, if they need up to $ 80,000 or more to do what they want to do. So it is genuinely a reflection of the fact that they would never be able to borrow the amount they need from a traditional bank.
Banks do have a centuries-old strategy which does not favor unknown factors, but there are options for raising funds for the infant company. In a business sector that banks were never meant to serve, alternative lending exists to fill a need.
Below are a few helpful tips to enjoy the benefits of Alternative Lenders.
Get You Strategy Organized
An individual and small business owner should undoubtedly start by organizing their strategy to receive the benefits of alternative lending. So, do you have a strategic plan that clearly outlines the goals of your company and how you are going to achieve them?
If not, that’s where you would have to get started. Specify in the strategy plan why you want the money for your business and what it will achieve.
If you’re not a person with numbers, it may be a good idea to find one, as lenders need to be reassured that you’ve been thinking through your idea and you’ve not just based your concept on a dream. You can convince a lender by presenting a clear and detailed business plan that your business is worth taking on a certain level of risk.
What is your credit condition?
The condition of your personal credit is another point to consider when seeking alternative lending. Let’s be clear; lenders will most likely pull your credit report and scrutinize it before they transfer the money to your bank account.
Save yourself some frustration, if you have credit problems, try to get them cleaned up before applying for a loan.
Do your homework
Finally, although many alternative lenders operate effectively legitimately, some people have been exploited by unscrupulous lenders. It is crucial to perform due diligence by comparing all types of lenders with shopping loan rates.
Weigh options and search for any hidden charges that may arise later down the road. At the very least, look for reviews from happy customers and check on your list for possible choices for reviews that other borrowers have given to any lender.
Choosing the best source of loans
There is no single most useful source of loans for individuals and small businesses. However, you can follow a few guidelines.
If you meet the criteria based on your credit score and business time, don’t need money fast, and don’t mind the amount of time it takes to complete an application successfully, a traditional bank loan could provide you with lower interest rates, higher borrowing limits, or favorable terms.
Consider an alternative lender if you need some funding quickly and easily, want a simple and fast approval process, or don’t meet the bank’s qualifications.
Finding the right lender is ideal. Once you’ve agreed that alternative financing is right for you and your business, it’s time to decide on the right lender, and the perfect way to make this difficult decision is through consultation.
An ideal lender is interested in investing the amount of time it takes to fully understand your business and help you to understand the benefit of a loan, as well as identify the right alternative options for your situation.
Alternative lender will answer all your questions if you have any concern and help you feel more comfortable. Individuals and businesses looking for funding should concentrate on finding a lender ready and willing to treat you and your business as a family.
We could be the option available you are looking for: we are specialized in building one-on-one long term relationships with the individual as well as small and medium-sized business owners. In any way we can, we are here to help you.
- The New York Times – Students Look to Loan Alternatives to Simplify Process and Ease Burden
- Annual Review of Financial Economics – A Review of Empirical Capital Structure Researchand Directions for the Future
- Capital University – Alternative Loans – Helpful Tips for Choosing an Alternative Loan
- Research Gate – A Research on the Influence Factors of P2P Lending Market
- thebalancesmb – Learn About Rewards-Based Crowdfunding
- accion.org – A longitudinal study on the impact of mission-based lending services on small business in the United States
- Journal Venture Capital – The interaction of equity crowdfunding platforms and ventures: an analysis of the preselection process
- Business insider – Invoice trading is the new darling of Australia’s fintech loan market
- Reserch Gate – The Case of Alternative Versus Traditional Financing: A Literature Review