Options under Alternative Lending – An Overview

Summary: A bank loan is not your only option if you want some funding for your business. There are many alternative lending options you can choose from. Make sure you weigh your options carefully before making your final decision.

Every business comes to a stage where it can’t move forward without funding. The most logical step an entrepreneur would take, at this situation, is to apply for a loan with a local bank. However, not all such applications are approved by traditional banks. In fact most small business loan applications are rejected.

It could be bad credit, the amount might be too small, or the very proposition of lending might seem too risky for the bank. In any case you don’t want to take a chance by relying on the bank to give you the required funds. Thankfully you have a lot of alternatives.

Many organizations and individuals are ready to offer funds to small businesses through alternative lending. There are different kinds of loans you can apply for. Each of these has its own set of pros and cons and might seem suitable to different businesses at different times. You need to do your homework on each of these loans and consider a lot of factors like APR, fees, eligibility restrictions, and time taken for approval, before deciding on any of them.

Here is a low down on the different alternative lending options available to small businesses:

Cash Flow Loan

Cash flow loan is a loan where you borrow an amount, keeping in mind the money that you are expected to receive in future. A lot depends on the past performance of your business and your sales projections when it comes to getting approved for cash flow financing. The focus of the cash flow lenders while approving loans is on your cash flow rather than your business assets or the health of your industry. Using computer algorithms they will analyze your past performance and income projections, based on transaction volume and frequency.

There are two ways of repaying cash flow loans: you can pay a fixed amount every month for a specified period of time, or you can arrange for the lender to receive a percentage of your sales on a daily or weekly basis.

Cash flow loans are usually associated with high fees as well as prepayment penalties. You will also have to pay high fines if you are late with your payments or do not have enough funds to cover a payment that has been scheduled. You might end up losing your business if you are unable to repay your cash flow loan.

Merchant cash advance

A merchant cash advance is a lump sum amount that you borrow in exchange for a specified portion of your future credit and debit card transaction income. Many merchant cash advance providers, in their effort to promote their business, have started contacting prospects directly through merchant cash advance live transfer leads.

In most cases the merchant cash advance provider takes his portion of your debit and credit card transaction income directly from your credit card processor, as and when a card is swiped at your POS. Alternatively you can link your bank account with that of the merchant cash advance provider to help him collect his funds.

Most merchant cash advance providers that come to you would agree to collect a pre-specified percentage of your sales until the entire loan amount is repaid. Some might insist on getting paid within a short period of time.

Since merchant cash advances are not bound or regulated by the State Usury Laws, there is no limit on the interest rates and fees that the lenders can charge the borrowers. It is recommended that you do your math and estimate the APR that you need to pay before signing up with any of the merchant cash advance providers who contact you.

Microloans

If the amount that you need to borrow is very small, a micro loan could be your best bet. It is very similar to a traditional loan when it comes to repayment. You can pay back the loan that you take in equal monthly installments.

If you approach a non-profit micro lender, you could even get some education and training that can help you overcome the challenges of your business with great ease. You might even get an effective marketing or business plan that might eliminate the concerns of your small business.

With minimal documentation required, micro loan is a very flexible alternative lending option that might seem ideal for sole proprietorship concerns and organizations with lesser number of employees.

Although the interest rates on microloans are slightly higher than that of the traditional bank loans, the APRs are a lot lower than the other alternative lending options.

Peer-to-Peer Loans

There are many online platforms that connect small businesses that are in need of financing with lenders who are ready to provide funds. Commonly known as P2P (Peer-to-Peer) lending platforms, they make money by way of service fees (that they charge the investors) and origination fees (that they charge the borrowers to participate). They can be repaid in fixed monthly installments and come with no prepayment penalties.

Many small business owners have started benefiting by choosing alternative funding options over traditional ones. Whether you decide on a micro loan, a cash flow loan, a P2P loan, or a merchant cash advance provided by a lender who comes to you, it is highly recommended that you do your research, weigh your options, read the terms and conditions, and then sign the agreement.