It's not always easy for small business owners to get financing for new ventures and timely opportunities. Fortunately, there are some good nontraditional options for acquiring business capital.
If you don't meet the bank's requirements for a conventional loan, alternative lending may be a viable solution for your funding needs.
What Are Alternative Small Business Loans?
At its core, alternative lending refers to the lending industry outside of traditional banks. When conventional banks turn them down, small business owners can turn to alternative small business financing to help pay for expansions, renovations or to take advantage of timely opportunities that require fast capital.
In recent years, alternative lending has grown, as more startups have captured the small business market previously denied or ignored by banks. As credit tightened in the wake of the financial crisis, many of these small business owners sought financing from the newest online lenders instead of local banks. Fast, flexible, convenient and flush with options, the alternative lending industry means credit is no longer limited to old and established companies.
According to the U.S. Small Business Administration (SBA), about 50 to 66 percent of small businesses seek financing from a variety of sources, including non-banking institutions. If you're looking for quick financing, consider the following options:
SBA Loans with a Fast Turnaround: If you have a strong credit score, you can get less expensive funding with an SBA loan. These used to take a few months to process, but express programs have sped things up to about a few weeks. On the positive side, these loans have between a 5 and 8 percent interest range, making them one of least expensive sources of small business funding. On the down side, you'll need to have a profitable business, some collateral and a credit score over 700 to qualify.
Marketplace Lenders: Appealing to very specific kinds of small business owners, marketplace lenders match prospective borrowers with investors. Examples include Funding Circle, Kickfurther and StreetShares. They offer fast, electronic applications and one-week processing. If you have a good credit score, you can get a low interest rate. On the other hand, if your credit is average, your rate can be as high as 15 to 20 percent. Most lenders do not require specific collateral; however, they do require a personal guarantee and may place liens on business assets. You must also meet specific requirements to qualify, and the loans are generally short-term.
- Online Alternative Lenders: According to data from Morgan Stanley, alternative lenders shelled out a whopping $7.9 billion in small business loans last year. With easy online applications and minimal or no paperwork, these loans are expected to only increase in popularity. Unlike traditional banks which can take weeks, or even months, to process an application, online alternative lenders provide approvals within days. Credit requirements are also much more lenient, as long as you've been in business at least a year and have annual revenues of at least $50,000. These lenders do require personal guarantees and may place liens on business assets. That said, you don’t have to pledge specific assets as collateral. On the down side, these loans can be quite expensive, with APRs between 20 and 80 percent.
How to Decide
With so many alternative lending options, it can be difficult to weigh all the pros and cons of each. To determine which is right for you, consider your personal and business credit score to determine your eligibility for certain loans. You should also factor in business revenues and span of operation. Finally, ask yourself how fast you need the money and weigh the costs against potential benefits, especially if they aren't guaranteed.