Small business owners face difficult times when trying to get their companies off the ground. For starters, there’s little to no collateral, which means applying for a loan in a traditional bank is pointless.
This leads to the next big problem: A credit profile to prove creditworthiness. Without an established profile, getting a loan from your local bank is impossible. With such bottlenecks associated with access to funding, small businesses are turning to alternative lending options in order to build business credit.
At this point, you may be asking yourself, “What is alternative financing, and what options are there?” Well, read on to learn more about the options you have at your disposal.
Alternative Business Funding: What is it?
Many people consider traditional banks as the primary source of business financing for obvious reasons. Therefore, alternative methods would be non-traditional lenders. Banks require you to pass the stringent measures put in place to vet businesses.
With alternative lenders, the terms are far more lenient and flexible than banks’. Such terms include collateral, business existence, and credit requirements among others. However, this flexibility and leniency come at a cost.
To compensate, these lenders set high-interest rates, and in some cases, you may be required to clear the quick bad credit loan faster than usual. Despite the high interests, these alternative lenders offer your business a lifeline to hang on to.
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Besides, if you pay the loans on time, the lender will report that to the credit bureaus, thus building a credit profile. This, in the long run, will enable you to apply for other types of loans in the future.
Take a look at some of the alternative lending options you may want to consider.
As the name suggests, the size of the loan is small. Non-profit organizations, or microlenders as they are known, issue microloans. For a startup or a small business, expect no more than $6,000. However, the maximum amount available is $50,000.
- Often issued to businesses with fewer than 5 employees.
- A good credit profile should get you qualified, but past problems may dim your hopes.
- Business training classes may be one of the terms.
Hits and Misses
The high-interest rates may leave a bitter taste in your mouth but at 12% to 18%, the rate is cheaper than other forms of alternative lending.
What might be a headache for you is the documentation requirements. Do not worry, though, because mentorship may be available during the entire application process.
Enough of the cons— the bright side is to pay the loans on time, and if the lender reports this behavior to the credit bureau, you’ll be on your way to building stellar business credit. What’s more, banks will be more than happy to offer you funds in the future.
2. Online Lenders
Let’s go back in time. Not too far back. Somewhere around the last recession. Banks were the go-to lenders for business financing until the recession hit and everything plummeted from the sky. Banks tightened the screws on all borrowers, especially small business owners since the rate of default was high.
This meant businesses had no way of accessing funds critical for business survival. However, just as the life support was going offline, online lenders emerged with a cure. They offered quicker responses on qualifications, not to mention the fast application process, which was available online 24/7.
While the requirements may be lenient, you should still expect collateral requirements and business, and personal credit approvals before accessing the funds.
- Business existence. The timeframe varies from one lender to another, but the typical period is about 2 years.
- Business and personal credit. Different from traditional banks, these two may not be as important or less strict but having a good rating will be a plus.
Hits and Misses
If you’re looking to establish or build business credit in the fastest way possible, then online loans are your best bet. In addition, online loans have a reputation of disbursing funds fast, thanks to their quick and simple application and approval process.
As you’d expect, these loans aren’t the cheapest in the market. Therefore, if you’re hunting for low rates to fund your business, you may want to look elsewhere.
However, the biggest concern raised by many borrowers is the lack of transparency when it comes to fees and rates. Make sure you go through all the terms and conditions before agreeing to anything. If you find it difficult to understand, consult a financial advisor.
3. Invoice Financing
This type of financing is suitable for businesses dealing in goods and services. This means payment comes after a fixed period. If this sounds like your business, then you may have a shot at securing business funds.
Also referred to as accounts receivable financing, invoice financing allows you to borrow money against the amount customers owe you. In other words, your invoice will act as your collateral for the amount borrowed.
- Your businesses must be in the B2B category.
- A credit profile may be necessary in order to determine creditworthiness. Nevertheless, they aren’t too strict, so you may get away with simple credit issues. However, major liens and bankruptcies can be a deal breaker.
- The lender may also ask for financial data for the past three months or more. Therefore, accounting software will come in handy in such situations.
Hits and Misses
This is one of the fastest ways to access business financing. Often, you’ll get the funds within 1 to 3 business days. This is because the application process is simple and fast due to the minimal paperwork required.
The biggest disadvantage of invoice financing is the high-interest rate. The cheapest rate starts at 14% and goes all the way to 68%. To further add to the pressure, most of the lenders will require rapid repayment. Often, you may have to make weekly payments until you clear the loan.
As you can see, invoice financing isn’t the best of routes. Thus, it’s advisable to steer clear of it and only consider if it’s the only card left.
What You Must Consider Before Applying for Any Financing
Before you can think of applying for any financing, it’s vital to consider 5 key areas:
- How the funds will grow your business or solve a crisis.
- Loan affordability. Can the business afford the loan you want to take out?
- Whether or not your business stands a chance of qualifying for the loan.
- Whether there are other better deals out there.
- Whether the lender reports payment behavior to the credit bureaus.
Getting your business off the ground is a tough task, to say the least. Business financing is a critical tool in this process. Nevertheless, it’s important to understand that all modes of financing harbor some level of risk.
Therefore, it’s only wise for you to do due diligence before taking out a business loan. Rushing the process may lead you to skip important details that may come back to haunt you in the future. Take your time, and later in the future, your credit profile will be a bargaining chip for the business.