Alternative Lending Options for Modern Businesses

For decades, traditional bank loans represented the ideal avenue of business financing, but as times have changed, and the world of lenders expanded over the last decade, they are no longer the only option. In fact, for many businesses today, they aren’t even the best option. Banks move too slowly, require too much documentation, and deny too many deserving businesses that aren’t easily categorized for lending.

Over the past decade, however, the world of funding has significantly diversified, allowing various alternative lenders and structures to maximize financing solutions for specific applications, industries or developmental stages. By knowing what’s available, funding becomes possible that fits the business rather than forcing the business to fit the funding.

Online Business Lenders

The most game changing option in small business lending over the last several decades is online lenders. Part technology, part data analysis, an online lender assesses financial needs in a fraction of the time of traditional options but also based on entirely different criteria. Years of tax returns and 780 credit scores are no longer the only way to get approved. Instead, some online lenders examine bank activity and payment processing history or real time metrics to assess loan requests.

Application decisions occur within days, not months, and legitimate online lenders can approve and fund loans in as little as 24 to 48 hours if the business has sound financials and proper documentation. Such rapid turnaround means that once in a lifetime opportunities don’t go to waste waiting for traditional approvals.

However, online lenders typically include much higher interest rates than conventional bank loans, and frequently they’re astronomically higher. But for businesses that need funding ASAP or don’t qualify for bank financing due to average credit or inconsistent financials, increased accessibility and expediency almost always justifies the increased price. Just make sure to pay attention to the effective annual percentage rate to know the true cost, not just the monthly payment.

Revenue Based Financing

Instead of fixed monthly payments corresponding to interest, revenue based financing provides repayment based on a percentage of monthly revenue until financing is repaid with an agreed upon return to the investor.

Therefore, when income is up, repayment is up; when income is down, repayment percentage decreases to accommodate revenue challenges. This option is great for seasonal businesses or those with variable income schedules. For example, if a retail store generates most of its sales in December, a repayment structure makes more sense where payments are proportional in December and February rather than pegged on a static payment.

Additionally, like invoice factoring, total repayment amounts typically exceed what would have been paid on a traditional loan, and such financing usually gets repaid faster during months when repayment is feasible. But automatic adjustments based on performance reduce default risk during down periods.

Merchant Cash Advances

Want instant cash? A merchant cash advance offers just that, as long as it’s on future credit card sales. A business receives an upfront amount of cash determined by its typical credit card sales processing; the lender gets a percentage of daily credit card receipts until the advance is gone.

These options work well for businesses that complete most (if not all) of their transactions through credit cards, such as restaurants or retail establishments. The approval process takes minutes as it relies upon historical averages instead of standard credit ratings and financial insights.

Where this option gets expensive is through effective APRs that often reach triple digits. It’s imperative to proceed with caution for merchant cash advances make sense in only very short term situations or emergency type scenarios where other options don’t exist.

Unsecured Business Loans

When a business requires financing but lacks viable collateral to facilitate a secured loan, unsecured loans fill that gap. Forbrukslån uten sikkerhet (Consumer loan without collateral) and similar no collateral options abound wherein entrepreneurs give up their rights to physical assets but still receive proper financing without required collateral on their part.

Unsecured loans do not require real estate holdings, equipment or additional business related assets to secure funding; if a business owner has sound credit and cash flow ability to repay, based either on business revenue or a personal note due to lack of physical assets, the unsecured loan becomes accessible. For service based businesses without substantial holdings, unsecured financing is often the only feasible option aside from equity financing.

In this case, interest rates are substantially higher than secured loans since lenders take on additional risk without collateral. Yet for business owners who can afford a premium since they don’t want to risk existing assets to debtors, unsecured loans are worthwhile albeit still personal guarantees for lenders exist. Therefore, it’s important for business owners to understand that personal finances could still suffer if business goes awry.

Invoice Financing and Factoring

For businesses that invoice customers on a 30 or 60 day term agreement, they can use outstanding invoices as a means of financing. Invoice financing allows a business access to funds based on what its customers owe it at any given time rather than waiting weeks or months for customer payments.

With invoice financing, the business still retains control of receiving payments; with factoring, the financing company purchases the invoice outright and collects payments themselves. Factoring often costs more expensive since it entails no collection burden on behalf of the business.

Both options work best for B2B companies that invoice frequently and consistently, and have reputable customers who will pay their invoices. The fees are generally 1% to 5% of the invoice value depending on payment terms and customer creditworthiness. But this alleviates gaps in cash flow when they could otherwise wreak havoc for a business in need.

Lines of Credit

Finally, one of the most versatile options that work like credit cards for borrowers are lines of credit. Instead of extended loans over set periods and terms, lines of credit allow lenders to extend borrowers maximum amounts but only take interest based upon what’s drawn down, not what’s allowed.

This flexible access makes lines of credit ideal for cash flow spikes and unprecedented expenses or bonuses; businesses can draw down access as needed, without starting from square one each time, and repay funds as needed without penalty.

However, getting access requires decent credit ratings to boast about since most lenders require at least one year of operational history before extending such opportunities. The interest rates vary tremendously based on what lenders might offer; however, they trend similar to credit cards, the flexible yet limited appeal make them enticing but initially unattractive.

Crowdfunding and Community Financing

Crowdfunding opportunities allow small businesses to seek out numerous small investors rather than one large loan or sponsor. Reward based crowdfunding works best if there’s a product involved; equity crowdfunding sells shares which requires more regulatory steps and time consuming challenges.

Crowdfunding works when there’s an awareness campaign; successful crowdfunding requires incredible awareness efforts; thus a campaign needs visuals just as much as effective buy in communication about what the business is all about and why it’s important moving forward. In short, a successful crowdfunding option validates not just financing needs but creates a market out of thin air.

Community development financial institutions offer local lending options as well for those businesses who don’t fit traditional criteria, and try to serve underserved groups or industries, all without capital potential but also mentoring/operational efforts if merited.

Conclusion: Finding What’s Right

Every alternative lending option can be beneficial but based on specific situations. A business with substantial credit sales may benefit from a merchant cash advance for super short term options, while an invoice based company may engage in invoice financing when appropriate; a seasonal entity may want revenue based financing since it takes into account lower payment amounts during those times when revenue isn’t as prevalent.

The key is understanding what costs will truly emerge from all variables, not just looking at interest rates and monthly payments compared to perceived standards. The higher seeming options may be less expensive when factoring in flexibility or expedited offerings; while lower rate options could create devastation down the road.

Alternative lenders expanded potential funders who wouldn’t qualify through traditional banks, but that doesn’t mean every lender option makes sense for any business. Understanding what type of finance fits best through purpose and repayment potential creates viable realities as opposed to unnecessary financial burdens.