March 5, 2024

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Alternative Business Lending 2023 – The Essential Guide

Alternative Business Lending 2023 – The Essential Guide

What is Alternative Business Lending?

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Alternative lending refers to small business loans and other financing products from non-bank lenders. Also called online lending, alternative business lenders typically offer a streamlined, digital approach to the lending process.

Alternative lending started to take off during the financial crisis of 2008 when traditional banks began approving fewer loans. Online lenders stepped up to fill the gap. A hallmark of alternative lending is using a tech-driven underwriting process to expedite loan approval and funding.

Fintech advancements since then have made alternative lending more and more popular with business owners. They like fintech lending because it offers much quicker access to the money they need to run their businesses.

Most lenders are willing to work with small businesses that don’t qualify for traditional bank loans. It’s estimated that alternative lenders have a 71% approval rate, compared to 58% among banks and credit unions.

The tradeoff for the lower qualification thresholds and speedy funding is that alternative lending can be more expensive. However, some alternative loans are more costly than others. You can reduce your costs with the right loan from the right lender.

There are three main types of alternative lenders:

  • Direct lenders: A direct or private lender is a financial institution that provides and services loans using its own money. Direct lenders can often provide more flexibility in loan structures and can take on loans that conventional lenders wouldn’t consider.
  • Marketplace lenders: A marketplace lending platform (like United Capital Source) connect applicants to a network of lending options. Marketplace lenders can usually offer diverse loans, and borrowers can sometimes shop multiple offers at once through a single application.
  • Crowdfunding platforms: Many small businesses still in the R&D or startup phase can’t qualify for traditional or alternative business loans. Crowdfunding platforms allow new companies to market their business idea to an extensive network of individual investors who can help fund the startup phase.

What loans do alternative lenders offer?

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One of the benefits of alternative lending is that it gives small businesses more financing options. Some lenders may only specialize in one or two business loans, while others offer a full suite of products.

Here are the most popular alternative lending options.

Term Loans

Term loans are the most common form of business financing, and both traditional and alternative lenders offer them. With a term loan, the small business receives a large sum upfront, which it then repays, plus interest and fees, in fixed payments.

Businesses can use term loan proceeds for various business purposes, including working capital, purchasing commercial real estate or equipment, expanding locations, acquiring another business, or refinancing business debt. Some lenders may restrict use, but it varies.

Many online lenders only offer short-term loans, which must be repaid within 18 months. However, several alternative lenders provide medium- and long-term loans as well. A term loan through United Capital Source offers the following ranges:

  • Amount: $10k – $5 million.
  • Rates: Start at 8%.
  • Term: 3 months – 10 years.
  • Speed: 1-3 business days.

Business Line of Credit

A business line of credit provides an available credit limit from which you can draw funds as needed. You then only repay what you borrowed plus interest and fees. Most lines of credit are revolving, meaning your credit limit replenishes when you repay.

Alternative lenders offer different amounts, rates, and terms for a line of credit. Business credit lines through United Capital Source have the following features:

  • Amount: $1k – $450k.
  • Rates: starting at 8%.
  • Term: up to 18 months.
  • Speed: 1-3 business days.

Equipment Financing

An equipment loan is like a term loan, except it’s specifically for purchasing business equipment. You can use the loan to buy most equipment, from commercial kitchen appliances to construction equipment to computers and office furniture.

The equipment you’re financing becomes the collateral for the loan. If you default, the lender claims the equipment to cover its loss. This is known as a self-collateralizing loan. You might be familiar with other self-collateralized loans, such as mortgages or car loans.

Equipment loans through United Capital source offer the following:

  • Amount: Up to $5 million per piece of equipment.
  • Factor rates: Starting at 3.5 %.
  • Term: 1-6 years.
  • Speed: 3-10 business days.

Invoice/Receivables Factoring

Invoice factoring, also called invoice financing, allows you to turn unpaid invoices into immediate working capital. The process requires working with a third-party financial institution called a factoring company. When you factor your invoices, you essentially sell ownership to the factoring company, which issues an advance based on the invoice value, called an advance rate.

Your customers pay their invoices directly to the factoring company, which then sends the remainder to you minus its fees. Invoice factoring through UCS offers:

  • Funding amount: $10k – $10 million.
  • Factor rates: starting at 1% p/mo.
  • Term: Up to 24 months.
  • Speed: 1-2 weeks.

Merchant Cash Advances

With a merchant cash advance (MCA), borrowers receive a large sum of cash upfront, which is then repaid from a percentage of daily debit and credit card sales. Some lenders use a fixed percentage, while others use flexible terms so borrowers only repay what they can afford. A merchant cash advance from United Capital Source offers:

  • Funding amount: $5k – $1 million.
  • Factor rates: starting at 1.09.
  • Term: 3-18 months.
  • Speed: 1-2 business days.

Who are the top Alternative Business Lenders?

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Business owners have many choices for alternative lending companies, and each offers benefits and drawbacks. Here are 5 of the top alternative lender options.

OnDeck

OnDeck is an online business lender with two products: business term loans and business lines of credit. The company launched in 2006 and has extended over $13 billion to small businesses.

The online lender specializes in quick funding for short-term financing. OnDeck is also known for approving businesses that can’t qualify for a traditional business loan.

To qualify, you will need the following:

  • A minimum credit score of 625.
  • At least one year in business.
  • Minimum annual revenue of $100,000

Fora Financial

Fora Financial is an online, direct lender that has distributed over $3 billion in business funding to over 35,000 companies. Based out of NY, the company provides working capital to help businesses invest in themselves and grow.

Fora offers two products: a short-term loan and merchant cash advance, with ranges between $5,000 and $1.4 million. The company doesn’t publish a minimum credit score requirement, but you must meet the following to qualify:

  • A minimum of 6 months in business.
  • $12,000 in gross sales for the short-term loan.
  • $5,000 in monthly credit card sales for the revenue advance.
  • No open bankruptcies or bankruptcies discharged within the previous year.

Fundbox

Fundbox is an online lending platform that offers term loans and business lines of credit. Their main product is the revolving line of credit, which offers credit limits of up to $150,000. Repayment terms are 12 or 24 weeks. Interest rates begin at 4.66% for 12-week terms and 8.99% for 24-week terms.

You must meet the following to qualify:

  • Minimum Credit Score: 600
  • Time in Business: 6 months
  • Annual Revenue: $100,000

Bluevine

Bluevine is a financial technology company specializing in small business financing and lightning-fast funding times. Its main product is a revolving line of credit for up to $250,000. In addition, it offers an online-only business checking account.

You must meet the following to qualify:

  • At least six months in business
  • At least $100,000 in annual revenue
  • A minimum credit score of 600

Funding Circle

Funding Circle is a peer-to-peer lending platform for business loans. The fintech company provides a combination of direct lending to businesses and investment opportunities to financial institutions.

It offers business term loans ranging from $50k to $500k, a business line of credit between $5k and $25k, and SBA loans. The company doesn’t list an annual revenue requirement, but applicants must meet the following qualifications:

  • At least two years in business.
  • A minimum credit score of 660.

How do I qualify for Alternative Business Lending?

Each lender and business loan carries different qualification requirements. Here’s what you need to qualify for alternative business loans through United Capital source.

Business Term Loans:

  • Credit score: 550+.
  • Annual revenue: $75k+.
  • Time in business: 6+ months.

Business Lines of Credit:

  • Credit score: 550+.
  • Annual revenue: $75k+.
  • Time in business: 6+ months.

Equipment Financing:

  • Credit score: 600+.
  • Annual revenue: $250k+.
  • Time in business: 1+ years.

Invoice Factoring:

  • Credit score: 550+.
  • Annual revenue: $255k+.
  • Time in business: 1 year.

Merchant Cash Advance:

  • Credit score: 550+.
  • Annual revenue: $120k+.
  • Time in business: 4+ months.

How to apply for an Alternative Business Loan:

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Follow these steps to apply for alternative business lending.

Step 1: Consider Your Needs

Before you begin the application process, take some time to make sure this is the right product for your individual needs. Will you be able to use the capital for your desired purpose? Is the repayment structure conducive to your cash flow? Do you know exactly how much funding to request?

Answering these questions ahead of time will make the rest of this process much smoother.

Step 2: Gather Your Documents

Documentation requirements vary depending on the loan you’re requesting. For example, invoice financing will require your A/R and A/P aging reports. A merchant cash advance requires bank statements showing card payments.

Regardless of the loan, expect to provide these basic documents during the application:

  • Driver’s license.
  • Voided business check.
  • Bank statements from the past three months.
  • Financial statements.

Step 3: Fill Out the Application

You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to supply the information from the previous section along with your desired loan amount.

Step 4: Speak to Representative

Once you apply, a representative will reach out to you to explain the repayment terms, interest rates, and terms you qualify for. This will ensure that there are no surprises or hidden fees during repayment.

Step 5: Receive Approval

If approved, funds should appear in your bank account in 1-10 business days, depending on your loan type.

What are the advantages of Alternative Lending?

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Alternative lenders use financial technology (fintech) to streamline the loan application process. Most platforms connect to your business bank account and accounting software to quickly analyze your finances. As a result, you get a quick and easy application with minimal documentation requirements.

Since the process is so streamlined, you can usually get an answer within 24 hours. Some lenders offer approval within four hours after applying. Lenders also utilize fintech to send funds quickly. Most alternative lenders can provide funding within 2-5 business days, with some offering next-day or even same-day funding.

Another key aspect of alternative lenders is that they use flexible underwriting to provide financing to more business owners. Many businesses that wouldn’t qualify for traditional business loans can find an alternative loan that works for them.

Since alternative lenders have more flexibility, they can offer a broader range of financing products. While they offer traditional term and SBA loans, many offer alternative lending options, like merchant cash advances and invoice factoring. The diversity of loans gives you more options.

What are the disadvantages of Alternative Lending?

The biggest drawback to alternative lending is the cost. Increased interest rates and fees are the tradeoff for quick and easy applications and fast turnaround times.

While it’s not always the case, alternative loans tend to be for lower borrowing amounts and shorter repayment terms. In addition, alternative loans usually require more frequent repayments, often daily or weekly. Short repayment terms with daily payments can strain your cash flow.

Some alternative loans, like merchant cash advances, take repayment directly from your revenue. You should always read the loan agreement carefully to ensure your cash flow can handle the repayment structure.

Alternative Lending Pros & Cons

Pros:

  • Quick and easy loan applications with minimal documentation.
  • Fast turnaround on loan approvals and funding times.
  • Less stringent approval requirements for borrowers.
  • Diversity of loan products.

Cons:

  • Tends to be more expensive than traditional loans.
  • Often offers smaller loan amounts.
  • Most have short repayment terms.
  • Some loans, like MCAs, take directly from your daily revenue.

Frequently Asked Questions

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Here are the most common questions about alternative loans for small businesses.

Is Alternative Business Lending legit?

Yes, alternative lending is a legitimate solution to circumvent traditional bank loans. Most online lenders are reputable and reliable, but always research a company before agreeing to take on debt.

Can small business owners with bad credit get an Alternative Business Loan?

One of the main advantages of alternative lending is the ability to find financing solutions when banks or credit unions won’t approve a loan. Several alternative lenders offer bad credit business loan solutions.

Is Alternative Lending better than traditional lending?

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Traditional lenders include commercial banks and credit unions. Most offer a manual approach to lending that requires significant documentation. The process usually takes days or weeks to complete. SBA loans can take even longer.

Online lenders offer an alternative to the traditional bank loan process. What differentiates them is fast and simple online applications and quick funding times. Deciding between a bank loan or an alternative business loan depends on your business financing needs.

A bank or credit union loan can save you money if you have excellent credit, an established business history, and don’t mind the tedious application process. However, alternative financing is your best bet if you’re a younger business, have good to subpar credit, or need urgent funding.

Do alternative lenders follow the same regulations as banks?

Alternative lenders are subject to a mix of federal and state laws and self-regulation but typically are not subject to the same regulations as banks.

Alternative Business Lending – Final Thoughts

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The emergence of fintech-powered alternative lenders in combination with traditional lenders gives more financing power to small businesses. The industry’s growth provides business owners with more loan options, the ability to shop prices, and can find a funding timeframe that works for the company’s needs.

Some online lenders offer niche financing services, like invoice financing exclusively for trucking companies, while others offer a wide range of loan products to diverse industries. As a business owner, you should be able to find lenders with experience servicing your industry that understands your unique challenges.

It is essential to ensure any alternative lender you work with is reputable and reliable. Many alternative lenders are trustworthy, but some just want to make a quick buck. Look for lenders who are upfront and transparent about their fees and have good online reviews.

Contact us if you have more questions about alternative lending or are ready to apply for a small business loan. Our loan experts can help you get the right loan, and you’ll get a complete breakdown of all costs involved.