The world of lending has shifted.
No longer are banks the sole gatekeepers of capital, which is good news for small business owners, who were often stymied by traditional banking institutions.
Now some small business loans for startups come from “alternative lenders,” mainly based online.
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What Are Alternative Lenders?
Alternative lenders are non-bank lenders.
While about 80 percent of small business loan requests to traditional banks are turned down, alternative lenders are more flexible and welcoming to small business owners.
They also offer a faster approval process, and often deal in smaller loan amounts.
Why Should Small Businesses Work with Alternative Lenders?
Since alternative lenders give business owners faster and easier access to capital of all kinds, on more flexible terms, many are turning to them in droves.
In this post-recession economy, the fact that a new class of lender will take a chance on small business owners is an opportunity few can overlook.
What’s the Catch?
Small business owners should be aware that alternative lenders tend to charge higher interest rates than traditional bank loans, with shorter repayment windows and more frequent payment periods (weekly, rather than monthly, for example).
Some have had issues maintaining solvency due to overly flexible terms.
Your interest rate will depend on a few typical factors—such as credit score, time in business, and annual revenue.
But it will also depend on the kind of loan you are looking for.
What Kind of Loans Can An Alternative Lender Offer?
Every business has different needs, and the right small business loan type for them will vary.
Alternative lenders can offer many of the same opportunities for working capital that a traditional institution do, and a few they don’t.
Short-Term Business Loan
A typical business loan that companies can use for a variety of purposes, from fixes to jumping on a great inventory bulk deal.
They typically range in amount from $2,500 to $250,000, to be paid off anywhere from 3-18 months.
Though the time to funding is short, the interest rate can be high (depending, as mentioned, on the factors above).
As opposed to a short-term loan, a term loan is repaid over a longer period of time (1-5 years) and can be used for even larger investments, typically up to $500,000.
Business Line of Credit
A line of credit, or revolver loan, gives you access to funds (typically $10,000-$1,000,000) that you can draw on at any time, and only pay interest on the money you’ve withdrawn.
You’re usually free to continue to draw on your line up to your limit, paying each draw back on a separate payment schedule.
Business Credit Card
Business credit cards are not unlike personal credit cards, though they may have some business-specific perks and rewards based on business and travel expenses.
They will also help you establish a business credit score.
Loan amounts are usually a bit higher than what you might get on a personal card as well.
Merchant Cash Advance
An “MCA” is when a lender buys a piece of business’ future revenues, which you pay back over time with your daily sales.
This is an appealing option for those who have fluctuating revenues:
When business is slow, your repayment is slow, and vice versa.
Because of this, a merchant cash advance has a factor rate (typically 1.14-1.18), rather than an interest rate.
Another form of alternative financing is to pre-sell outstanding invoices—between 50-90 percent of their value—and split the remaining value when your customer has paid.
The factor rate is about 3 percent per week.
Time to funding can be as little as 24 hours, making it a quick fix.
A Small Business Administration loan comes directly from the government agency, and can be used for working capital, refinancing other debts, franchising, and more.
These loans have generous terms, including low rates and long repayment periods.
Personal Loans for Business
If you take out a personal loan, there’s no reason why you can’t use it for business purposes (unless stated otherwise).
Startup Business Loans
Again, if you’re starting a new business and have little business credit history, you can utilize a number of options to obtain the capital you need.
Startup business loans can come in the form of leveraging your personal assets and credit, using peer-to-peer lending services, microloans from nonprofits, crowdfunding, credit cards and more.
There are dozens of options out there for alternative lenders, and some can be used in conjunction with one another.
If you need an infusion of capital in the near future, consider speaking with an alternative lender before you approach your local bank.
You might enjoy the change of pace.