Without a steady and reliable supply of cash, your business cannot survive. Both traditional and non-traditional term loans might offer the money you need at terms you can handle. Read on to learn what differentiates old-school term loans from their less conventional counterparts.
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What’s the Difference Between Traditional Term Loans and Non-Traditional Loans?
The first step is to clarify what is meant when we refer to a ‘term loan.’ When most people think of loans, the traditional term loan is usually what comes to mind.
Traditional Term Loans
Traditional term loans have a very straightforward structure. You borrow at either a fixed or variable interest rate and make regular payments until the loan is repaid. The great thing about these loans is that you always know how much you owe, when your loan period ends, and exactly how much your minimum payment is.
So what is it that makes a loan “non-traditional?” This language actually refers to the lender from whom you procure the loan. In the past, banks were the primary entities who granted these types of arrangements. However, recent economic conditions have spurred change in the business lending industry. There’s been a sharp decrease in the number of small businesses approved to receive traditional loans through a standard bank.
Types of Non-Traditional Loans
These days, traditional term loans are being replaced by non-traditional arrangements through institutions other than big banks. There are numerous choices available to qualified small business owners. No matter what you decide, it’s crucial that you review all the options and choose what’s right for your business needs.
One of the most talked-about funding streams in recent years is crowdfunding. With online crowdfunding, you make a case to potential lenders as to why your company deserves a loan. Also called peer-to-peer loans, you’ll want to have a personal credit score above 620 for crowdfunding. You should also be ready to put your own credit on the line in case you default on the loan.
Another popular method for quick access to financing is invoice financing (or invoice factoring.) With invoice financing, you can sell your outstanding invoices to a lender in exchange for a lump sum of cash. It’s a powerfully simple way to get a quick infusion of fluid cash. Keep in mind though, the cost of this form of financing is higher than most.
Merchant Cash Advance
A merchant cash advance is another non-traditional lending mechanism you can use. Great for companies that process a lot of debit and credit card transactions, an MCA makes financing easy for those with poor credit. Although costs and interest rates are high, the approval process is quick, making this ideal for emergency situations.
On the more conventional side (but still more flexible than big banks) are loans sponsored through the Small Business Administration (SBA). This independent federal agency provides incentives to lenders who then furnish short- and long-term loans to stimulate small business.
Now that big banks are shying away from small business lending, alternative loan service providers have rushed in to fill the gap. Carefully assess the nature of your business, the amount of cash you need and the time that you believe it will realistically take for you to repay the loan. Armed with these facts, explore both traditional lenders and alternative financing options. You may be surprised to see how much financing you can qualify for with a non-traditional lender.