Years ago, it was often difficult to get approved for a traditional bank or a credit union loan. Business owners had to borrow from their family, friends, or against receivables. Today, thanks to alternative lenders and institutional investors, entrepreneurs have better chances to get business funding even with bad credit for their companies.
Funding Options for Small Businesses
- Alternative Lenders
Alternative lending came into existence after 2008 financial crisis when small businesses saw it was difficult for them to get approved for a traditional bank loan. Online lenders built web-based lending platforms that made it easier and faster to obtain funding for a small businesses. With years, alternative lenders gained more popularity and turned into a new normal for small businesses.
Below you can find the 4 main types of alternative lending options designed for small businesses:
- Invoice Factoring – Is a great option for unpaid invoices
- Line of Credit – Offers a certain amount of cash that is ideal for meeting short-term financing needs
- Merchant Cash Advance – Allows for getting an advance on future credit card or debit card sales
- Term Loan – Enables business owners to borrow and repay the loan within 4-5 years
One of the advantages of alternative lending is that it is a good option for those small businesses that are looking for finances to meet an urgent business need. Also, it offers simplicity and speed of getting approved and provide longer-term loans to help businesses grow. However, rates are usually higher than those of traditional banks.
- Institutional Lenders
Institutional lenders have to do with insurance companies, family funds, hedge funds, and other non-bank institutions. In July 2015, 61.7% of small business loans were approved by institutional lenders. This was up from 61.4% in June.
As for pros of institutional lending, this type of lenders make huge investments in technology, act promptly, and provide faster approval than alternative lenders and traditional banks. If you are a starter, institutional lending can be a viable option for your business because it offers lower interest rates. As a rule, institutional lenders can access a comprehensive profile of businesses that turn to them for loans. In addition, they do not require any specific collateral for loan approval and offer loans with terms of 1-5 years or even shorter. Institutional lending is not a good option for businesses searching for big investments. Unlike traditional banks and most lenders, institutional or alternative lenders use sophisticated software tools and data metrics to evaluate a business.
- Collaborative Lending Opportunities – Small business owners can also consider choosing a collaborative lending opportunity. There are banks offering partnership with alternative lenders to provide loans geared to the needs of a business.
Before approaching an institutional or alternative lender, make sure to provide a strong business plan and good credit score. Look for the lender that specializes in your business sector and is most suitable for your business needs.