The Insider’s Guide To Alternative Lending

What Is Alternative Lending?

During the financial crisis of 2008, entrepreneurs found it harder than ever to get approved for loans. Alternative lending emerged as a much-needed solution, providing easier access to financing. As Forbes.com put it, “For every bank that says ‘no,’ there are alternative lenders who are eager to say ‘yes.’”

As more and more small business owners turned to marketplaces, this financing method gained traction. The US Department of the Treasury conducted an in-depth study and concluded that marketplace lending is “a fast-growing sector that is continuously evolving.”Another study revealed that alternative lending will remain a “permanent part of the landscape.” The main reason for this staying power is that marketplaces provide access to funds for those who would often get rejected by a bank.

The Benefits Of Alternative Lending

While institutional bank lending has been around for centuries, alternative lending is the new kid on the block. At its core, alternative lending is any type of financing that doesn’t follow the traditional structure of the aforementioned banking system. So rather than driving to your local bank, waiting for a loan officer to meet with you, and then beginning the tedious slog of applying for a loan that probably has a low approval rate, you can fire up your computer and submit an application from the comfort of your couch.

Online lending platforms have changed the game by connecting small business owners with a wide array of financing options. The lenders that participate in alternative lending are familiar with small businesses and willing to work with them. Traditional banks, on the other hand, often view small businesses as risky ventures. On top of that, the lower value loan amounts commonly sought by small businesses don’t make as much money for banks, further depleting their willingness to play ball.

Here’s a closer look at some of the key benefits you’ll find with alternative lending:

1. Bigger Selection

Every small business is different, so it stands to reason that cookie-cutter financing usually won’t be a comfortable fit. Alternative lending provides more diverse options courtesy of lending marketplaces like Lendio that gather more than 75 lenders from around the country. Ample options are essential when it comes to finding a loan that works seamlessly with your business operations and style.

2. More Acceptance of New Businesses

When lenders receive an application, their first question will be whether or not they can trust the borrower to repay the money. The problem for newer businesses is that they haven’t yet had the opportunity to establish a financial track record.

With alternative lending, borrowers connect with lenders that have more relaxed lending requirements. This flexibility means a company just getting off the ground can often find the financing it needs to really take flight.

3. Faster Application Process

While bank loans can drag on for months before providing you with a single penny, the lending platforms in the alternative lending industry deliver expedited options. You’ll often have simpler applications that require less documentation. And because these platforms use advanced technology, the underwriting process is much quicker, which provides faster results, with some loan decisions arriving in just 24 hours.

4. Faster Funding Process

Not only are the applications usually breezier with alternative lending, but the money hits your account sooner. This quick availability is a crucial detail because there are situations where small businesses owners need cash immediately, such as replacing a key piece of machinery, hiring new staff to meet seasonal demand, or taking advantage of an incredible new business opportunity that has suddenly presented itself.

Time is money, so any loan that provides faster funding is going to benefit your bank account. With some alternative lending products, you can actually get cash within just a few hours of approval from the lender. That’s right—you can have the money you need in less time than it takes to watch Titanic.

5. Better Odds of Success

While banks are infamously stingy with their loans, the vast majority of requests submitted through a lending platform are approved. This higher approval rate saves you time and money, as you’ll get faster access to financing and won’t waste precious time and resources on options with low chances for success.

6. More Flexibility 

Because banks are set up to handle massive loans for large corporations, they often don’t want to deal with the more conservative financial needs of small businesses. But when you need to borrow $6,000 to buy new refrigerators for your restaurant, you shouldn’t feel pressured to increase that amount just to appease the lender. You should find a lender that is happy to provide you with $6,000.

Alternative lending helps make this possible by connecting you with lenders of all shapes and sizes. Some are equipped to offer loan amounts worth millions of dollars, while others provide you with smaller loans tailored to your needs.

7. Better Technology

Traditional loans often require mountains of paperwork, but any lending platform worth its salt will allow you to quickly upload any necessary digital files. Plus, the very nature of alternative lending is geared toward borrowers and less stringent requirements.

From application to funding, an alternative lending platform is programmed to keep your data more secure and make your life easier. The fact that you can connect with a lender via your mobile phone would’ve seemed unbelievable to entrepreneurs a decade ago.

While these benefits certainly make a compelling case for alternative lending, it’s important to note that you may encounter a couple of disadvantages with some of the financing options found on a lending marketplace. First of all, the interest rates on some loan products may be higher than average. Carefully research your options to make sure you find lenders that offer competitive rates that work for your budget.

Also, the lending terms may be shorter for financing options on a lending marketplace. Terms between 1–5 years aren’t uncommon, while bank loans typically offer more time to repay the money you borrow. Shorter terms don’t necessarily mean you’ll pay more money in total, but they do mean you’ll pay more each month.

Types Of Alternative Lending Products

Your first objective before seeking a loan is to figure out your plan for spending the money. The key elements of this plan are how much cash you’ll need and how quickly you want to see it in your bank account.

By identifying the size and timeline of the loan, you’ll be able to quickly narrow your options because many loans are structured in ways that could make them obsolete depending on your plan.

Here’s an overview for 11 of the most popular financing options available through lending marketplaces:

1. SBA Loan: Beloved by entrepreneurs, these loans are unique because the Small Business Administration (SBA) guarantees a significant portion of the money you borrow. This guarantee encourages lenders to work with you even if your financial history is less than stellar. The loan amounts go up to $5,000,000, with generous terms similar to those found at big banks. The only downsides to these loans are that the applications require mountains of paperwork and the funding process can take up to 3 months.
2. Business Line of Credit: Here’s a flexible option that provides amounts ranging from $1,000 up to $500,000. Rather than a lump sum, you can use this revolving form of credit whenever you want. The money usually becomes available in a couple of weeks and you can expect interest rates to start around 8%.
3. Business Term Loan: While short term loans are built for speed and agility, these loans are more robust. You can get amounts up to $2,000,000, which ranks them among the largest of the loan world, and you can actually get that money in just a few days. Interest rates can be quite favorable, starting around 6%. And the repayment terms have more variance, sometimes stretching up to 5 years.
4. Equipment Financing: As the name suggests, these loans are engineered to help you handle equipment needs. Whether you need to buy a new tractor trailer, repair a dump truck, or install new software on the computers in your office, you can get up to $5,000,000 to make it happen. The money moves fast, becoming available in as little as 24 hours. Also, the interest rates start at a borrower-friendly 7.5%.
5. Merchant Cash Advance: While many loans are approved based on your past business performance, this financing lets you borrow against your business’s future earnings. So if things are trending upward, you should be a solid candidate for amounts ranging from $5,000 to $200,000. The good news is that the money can reach you in just 24 hours. The bad news is that interest rates start at 18% and may go even higher.
6. Business Credit Card: If you’re like most Americans, you’ve got at least one credit card in your wallet right now, which means you’re already familiar with how a business credit card works as it’s remarkably similar to the personal version. Business credit cards provide you with a revolving amount as high as $500,000, with interest rates starting as low as 8%. The applications are light on paperwork and you can receive access to the money in 2 weeks.
7. Commercial Mortgage: When you have property needs, consider a commercial mortgage. Whether it’s for a restaurant, warehouse, office, or retail space, these loans connect you with as much as $5,000,000. Interest rates can start at a pleasantly surprising 4.25%. It’s worth noting that these loans are asset-based, so the amount and rate you are approved for will be at least partially dictated by the property you will be using as collateral.
8. Accounts Receivable Financing: This form of financing, also known as factoring, makes it possible to sell your receivables and purchase orders. Essentially, the lender gives you up to 80% of your receivables then goes through the trouble of tracking down your debtors and collecting the money owed. You can often get funded in only 3 days or so, with the factor rates starting at 5%.

Consider Working With an Alternative Lending Expert

If the boundless possibilities available through a lending marketplace sound a bit overwhelming, never fear. Many experts can help evaluate your financial situation and guide you to the best option for your needs.

The thing to remember is that, regardless of your unique situation, there’s a loan out there for you. It just takes some thoughtfulness on your part to navigate the many potential matches to find the one that’ll make your heart sing and your bottom line soar.