Why Alternative Lending Is Becoming More Popular Than Bank Loans
Alternative lending filled the void after the 2008 financial crises by lending monies to needy businesses, and they have steadily grown in popularity as bank loans became more difficult to procure in the past decade. They cycle was inevitable. As more businesses turned to alternative lenders, they told other business owners, who then turned to the alternative as well. Now the question is being asked by businesses and banks alike, why are alternative lenders becoming more popular than banks for businesses in need of loans?
What Are the Alternative Lenders Available?
There are many types of alternative lenders, but the four main groups are:
- Term Loans – a lump sum of money borrowed for an agreed upon length of time at an established annual percentage rate.
- Invoice Factoring – selling the business AR’s allows for instant money instead of waiting for the customer to pay.
- Line of Credit – an agreed upon amount that can be pulled out as needed and paid back with monthly payments or all at once. It can repeatedly be borrowed in part or
- Merchant Cash Advances – offer advances on future debit card sales or credit card sales.
Why Does Alternative Lending Work for Businesses Instead of Bank Loans?
The short answer is two-fold: flexibility and technology. Gone are the days when a bank loaned a business money for two years with a balloon payment required at the end. Now a business can ask for a line of credit that can be paid and repeatedly reused as needed. Alternative lenders also allow for weekly, monthly, and semi-annual loans; in other words, they are willing to work with the borrower and become imaginative when creating loan terms. The same can be said about interest rates. They have become as flexible as the payback dates.
Technology has also become a boon to business borrowers because the alternative lenders can evaluate the credit-worthiness of a borrower more quickly. They also use different data than banks to evaluate a trustworthy score for each business, and so their evaluation results in different scores than a bank would. Relying on tax returns, social media, bank statements, and online accounting, alternative lenders can rapidly analyze the data and get the money to the borrower much more quickly than standardized banks.
Is an Alternative Lender Right for Your Business Loan Needs?
Alternative funding has opened a whole range of lenders; from investors to brokers, and even peer-to-peer loans. If you need working capital and are a business owner, check out the alternative lending options available to you. Banks are no longer the only route available when seeking a business loan.