What Is Alternative Lending?
Many small businesses tend to seek help from local banks to raise capital on there business journey.
Not knowing that there are other “Alternative Lending” sources out there that can assist them as well.
Let’s venture out together 
and see how these special resources can help small businesses out in times of need.
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What Is Alternative Lending?
Alternative lending refers to non-traditional methods of providing loans or financial services outside of traditional banking institutions like commercial banks.
Business alternative lending specifically focuses on providing funding solutions for small businesses that may face challenges in obtaining traditional bank loans. Learn more
These alternative lending options have gained popularity, especially among small and medium-sized enterprises that may have difficulty meeting the high measuring requirements of traditional lenders.
Different Styles Of Alternative Lending
- Online Lenders: Numerous online platforms and techie companies offer quick and convenient loan options for businesses. These lenders often use advanced algorithms and data analytics to assess creditworthiness, making the application process faster than commercial banks.
- Peer-to-Peer Lending: Peer-to-Peer lending platforms connect individual investors with businesses seeking loans. These platforms facilitate the lending process without the involvement of traditional banking or financial institutions.
- Invoice Financing: This type of lending involves businesses selling their outstanding invoices to a third party (a factor or financing company) at a discount in exchange for immediate cash. It helps businesses maintain cash flow by accessing funds tied up in unpaid invoices.
- Crowdfunding: Small businesses can raise capital by presenting their projects or business ideas to a large number of individuals through crowdfunding platforms. Contributors, often small investors or supporters, provide funding in exchange for rewards, equity, or loan repayment.
- Merchant Cash Advances: In this model, a business receives a lump sum of capital upfront in exchange for a percentage of its daily credit card sales, plus fees. Repayment is tied to the business’s daily sales. Learn more
- Microfinance: Microfinance institutions provide small loans to entrepreneurs in developing countries or underserved communities who may not have access to traditional banking services.
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What Are The Benefits?
Business alternative lending offers several benefits, particularly for small and medium-sized enterprises or businesses that may face challenges in obtaining financing from traditional banks. Learn more
Here are some of the major key advantages:
A. Quick Approval and Funding:
- Alternative lenders often use advanced technology and data analytics to assess creditworthiness quickly. This results in faster approval processes compared to traditional banks or financial institutions
- Quick access to funds can be crucial for businesses facing urgent financial needs or opportunities.
B. Accessibility:
- Alternative lending options are more inclusive, providing opportunities for businesses that may not meet the tough criteria of traditional banks.
- Small businesses, startups, or those with less established credit histories may find it easier to access financing through alternative lenders.
C. Options in Loan Products:
- Alternative lenders may offer a variety of financing products, such as lines of credit, short-term loans, invoice financing, and merchant cash advances, allowing businesses to choose the option that best fits their needs.
- Tailored financial solutions can help address specific challenges or opportunities faced by different types of businesses.
D. Less Stringent Requirements:
- Traditional banks often have strict requirements for collateral, credit history, and business plans. Alternative lenders may be more willing to consider other factors, such as cash flow, when evaluating loan applications.
- This flexibility can be especially beneficial for businesses with limited assets or those in industries with unconventional business models.
E. Technology Streamline:
- Many alternative lenders leverage technology to streamline the application and approval processes. Online platforms and digital solutions make it convenient for businesses to apply for loans and manage their financial transactions.
F. Innovative Funding Models:
- Alternative lending includes innovative models like crowdfunding and peer-to-peer lending, which allow businesses to secure funding from a large pool of individual investors or contributors.
- These models can provide exposure and support from a community of backers who believe in the business idea.
G. Spreading The Risk:
- Some alternative lending models, such as revenue-based financing or merchant cash advances, tie repayments to a percentage of the business’s daily sales. This can provide a level of flexibility and spreading the risk between the lender and the business.
What Are The Risk Factors?
While business alternative lending can provide valuable financial solutions, there are inherent risks associated with these non-traditional financing options.
It’s important for businesses to carefully consider these factors 
before engaging with alternative lenders:
- Higher Cost:
- Alternative lending options often come with higher interest rates and fees compared to traditional bank loans. This is because these lenders may be taking on higher risks by serving businesses that might not qualify for traditional financing.
- Lack of Regulation:
- Some segments of the alternative lending market may not be as heavily regulated as traditional banking institutions. This can result in a lack of standardized practices and transparency, making it crucial for businesses to thoroughly review the terms and conditions of any alternative lending arrangement.
- Array Of Terms and Conditions:
- Terms and conditions of alternative loans can vary widely. Businesses may encounter less favorable terms, such as shorter repayment periods, daily or weekly repayments, or more frequent interest calculations. It’s important to understand and plan for these variations.
- Unscrupulous Lending Practices:
- In some cases, businesses may encounter unscrupulous lenders engaging in predatory lending practices. This can include excessively high-interest rates, hidden fees, and unfavorable repayment terms. Due diligence is crucial to avoid falling victim to predatory lenders.
- Limited Regulatory Protection:
- Traditional banks are subject to various regulations designed to protect borrowers. In the alternative lending space, regulatory protection may be more limited, potentially exposing businesses to less oversight and fewer avenues for recourse in case of disputes.
- Revenue Sensitivity:
- Some alternative lending models, such as merchant cash advances or revenue-based financing, tie repayments directly to the business’s revenue. While this can provide flexibility, it also means that the business is more sensitive to fluctuations in cash flow.
- Overreliance on Short-Term Debt:
- Small businesses that frequently turn to alternative lending for short-term financing needs may find themselves in a cycle of debt. This can lead to a dependency on high-cost financing and financial instability in the long run.
- Information Security Concerns:
- Many alternative lenders rely on technology and digital platforms to streamline their processes. Businesses should be aware of potential data security risks and ensure that sensitive information is handled securely.
- Market Changes:
- Economic downturns or changes in market conditions can impact alternative lenders, potentially affecting their ability to provide funding or leading to changes in their terms and conditions.
- Reputation Concerns:
- Engaging with certain alternative lenders, especially those with questionable reputations, could have negative implications for a business’s image. It’s essential to research and choose reputable lenders to avoid damaging the company’s credibility.
Conclusion
Small businesses considering alternative lending options should conduct thorough research, carefully read and understand the terms of any agreement, and, if necessary, seek advice from financial professionals. 
Maintaining financial transparency and ensuring that the chosen financing aligns with the small business’s long-term goals are crucial steps in mitigating the risks associated with alternative lending.
Thank you for your time today.
Sincerely,
Derrick M.
Business Capital Specialist
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