Alternative business lending

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    Chris Godfrey

    Page written by Chris Godfrey. Last reviewed on September 6, 2024. Next review due October 1, 2025.

    When your business requires a loan but your traditional bank says ‘no’, or you can’t wait weeks or months for loan approval, fast and flexible alternative business lending may be the best solution for your funding needs. 

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      What is alternative business lending?

      Alternative business lending is a term for business finance options that are not conventional bank loans. Also known as ‘online lending’ this type of funding is provided by nonbank lenders such as fintech companies or private investors and is usually obtained via a streamlined, online application. Often, the applicant will not be required to submit any physical paperwork, and in some cases, loans can be approved and funded in 24 hours or less.

      Online lenders tend to be more flexible with their qualification procedures. This makes alternative business financing a good option for businesses that cannot qualify for traditional bank loans due to factors such as poor credit history, lack of collateral, or the need for faster funding. However, borrowers should be aware that this type of financing often comes with higher interest rates and fees.

      What are different types of alternative business financing?

      Alternative business financing is designed to meet the different financial requirements of all types of business. Funds may be used for general purpose needs or to finance a specific project or purchase:

      1. Business line of credit

      A business line of credit functions like a high-value credit card but comes with lower interest rates and fees. Organizations can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. Interest rates are usually fixed, and businesses may repay on a set or flexible schedule. This kind of loan is ideal for organizations that want maximum flexibility or for investment situations where the total cash required is unknown. 

      • Pros: Only pay interest on the cash you use
      • Cons: Higher levels of reporting usually required to maintain access to the loan facility

      2. Term loans

      The most common type of business loan. Term loans are typically used for one-off investments where you know exactly how much cash you need. Commercial real estate purchases, plant and equipment investment, and debt repayment and restructuring activities work well with this kind of loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments, plus interest and any fees, over a fixed period of up to 25 years. 

      • Pros: Fixed interest rates and predictable repayment instalments
      • Cons: Few options to ask for extra funding or change the terms of the loan after closing

      3. Merchant cash advance

      Available for businesses that accept customer payments by credit and debit card. A merchant cash advance allows you to borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

      • Pros: No added collateral required. The loan facility grows as your card sales go up
      • Cons: Not suitable for businesses that don’t take card payments. Loan facility can also go down if your card sales fall

      4. SBA loans

      Standard SBA 7a business loans are provided by banks, credit unions and online lenders who are part of the Small Business Administration (SBA) lender network. Partially backed by the US Government, these loans can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. 

      SBA loans usually come with much lower interest rates and fees than other commercial lending but meeting their strict rules of eligibility can be tough for many businesses. As well as an approval process that can take several months, organizations will typically need to have been in business for at least four years and have annual revenues over $180,000. Your personal credit score must be at least 680.

      • Pros: Lower interest rates and fees
      • Cons: Strict rules on eligibility

      SBA Microloans and community advantage loans

      Nonprofit and community-based lenders can provide SBA Microloans and community advantage loans for businesses that struggle to secure standard business loans of $100k or less. These types of SBA loans are ideal for underserved communities, including women, veterans, minorities, immigrants and refugees. 

      SBA Microloans are available up to $50,000 and can usually be secured with FICO scores as low as 500, or even with no credit score at all. However, they often require collateral or a personal guarantee that makes you personally responsible for the debt, not your business. Community Advantage loans function much like regular SBA 7a business loans but come with a maximum of $350,000 and other features that may make them easier to secure.

      5. Equipment financing

      Buying big ticket machinery and equipment can put a major dent in your cash flow, but equipment loans can pay for your new plant and machinery without causing financial stress. Equipment loans are ‘self-collateralizing’ – they use the asset you’re financing as security, similar to a car loan or a residential mortgage. Once the loan is approved, the lender sends the funds to the equipment vendor, who then delivers the machinery. You use the equipment as you pay for it and the lender maintains a lien on the title to the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright.

      • Pros: No need to provide your own collateral
      • Cons: Can only be used for equipment purchasing, does not provide any cash 

      6. Invoice financing

      Also known as account receivables financing, this type of loan allows you to borrow against the value of your unpaid invoices and is best for B2B organizations. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised. You may still be responsible for collecting the cash from your clients, or the lender (also known as the ‘factor’) may collect on your behalf. If you collect, you must repay the lender on their schedule. If they collect, they will take back their advance from the client’s payment and then pass any residual sum (after charging interest and fees) back to you. 

      • Pros: Get paid in days instead of waiting weeks or months
      • Cons: High fees and interest rates. You may lose control of your sales ledger

      How to get alternative business loans

      It always makes sense to shop around for different offers before settling on a loan. You can do this by approaching alternative lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of loan deals from a range of lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for business owners who have never taken out a business loan before. 

      What are the benefits of alternative business loans?

      Alternative business lending can deliver significant advantages over traditional business borrowing:

      Flexibility

      Unlike traditional banks and credit unions, alternative business lenders can usually offer greater flexibility during the approval process. Businesses that have been turned down by their regular bank may still be able to obtain the funds they need.

      Accessibility

      As well as businesses that have financial challenges, young businesses, start-ups, non-profits and organizations that operate in high-risk industries will typically find it easier to obtain a loan from an alternative lender than a main street bank or credit union.

      Fast funding times

      Due to their streamlined application processes and greater use of new technologies, alternative business lenders usually offer faster funding times than their main street competitors. In some cases, instead of waiting weeks or even months for their bank loan to come through, businesses can get their alternative loan approved in minutes and have the funds in their bank account the same day or next business day.

      Ease of application

      Most alternative business loans are obtained via a simplified online application, usually just a single page questionnaire. Paperwork is also kept to the minimum – recent bank statements, balance sheet and a cashflow forecast are often all that is required.

      Get started with Swoop

      No matter if you’re seeking your first business loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for a loan. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality business loans from a choice of lenders. Give your organization the financial boost it deserves. Register with Swoop today.

      Written by

      Chris Godfrey

      Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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