Either at the startup phase to launch a new business idea or sometime later when you’re looking for financing to fund an expansion, you’ll probably be looking to borrow some money to advance your small business. As the small business financing landscape has changed, more alternatives to traditional bank loans have been created. Some of the popular options include microloans or community loan funds, crowdsourcing, and peer-to-peer lending. Alternative lenders typically offer three key advantages over traditional lenders.
Relaxed Credit Requirements
Many small business owners, especially when they’re first starting out or in the first few years of operating their businesses, have a hard time meeting the strict credit requirements for a traditional bank loan. Most alternative loan sources are not so laser-focused on credit scores, but instead take in to account other factors, such as the history of your business and the probability that you’ll be able to repay the loan. This can be a key advantage in securing the financing you’re seeking, because many traditional banks focus exclusively on credit history and credit score, ignoring such things as the fact that your business has a provable positive cash flow. You may have to pay a premium in terms of higher interest rates, but if you can secure the financing you need to help your business grow, that may be a small price to pay in the overall scheme of things.
Alternative lenders may ask about the purpose of the loan you’re seeking, but they usually don’t put restrictions on how you use the money in the actual financing contract. In contrast, many traditional lenders put very strict requirements on how you may use the funds provided to you in the form of a business loan. Having flexibility on how you use borrowed capital can be an especially important factor for a small business, which may need to apply funding to several different aspects of its operation. It’s also possible that after borrowing money, you discover a more potentially beneficial or necessary way to use the money you’ve borrowed. For example, you may have sought a loan to expand your business, but an unexpected financial emergency could arise after you secure the financing. Having the flexibility to divert some of the borrowed funds to meet the emergency may be critical to keep your business financially sound during a temporary difficult period. Alternative lenders also tend to offer greater flexibility in loan repayment terms, which may make it much easier for you to pay back the loan.
The loan process with an alternative lender may take as little as 24 to 48 hours to secure your loan. The process is usually much more drawn-out with traditional lenders, requiring you to spend hours filling out paperwork, which is time that you could have been working on productively advancing your business. Time can make critical difference if, for example, you have a key piece of production machinery break down that has to be replaced. When your small business requires funding, explore all of the available options. You may find that working with an alternative lender is indeed an attractive option.