The term alternative business loans caters to a variety of loans that are readily available to small business owners apart from bank loans. This caters to everything, from working capital, short-term to commercial loans spanning a long list of terms. Alternative lending options offer flexibility in terms of credit requirements when compared to conventional loaning options. In addition to this, the application and approval process is easier, which means that you will get funds faster than you used to get in the conventional bank loan.
All in all, there are diversified financing options available at your disposal. But, the option that is ideal for you along with the terms associated depends on your financial needs. Let’s look at the different alternative business loans options, which you can leverage to raise capital:
Short Term Business Loans
Businesses who are looking for a short-term loan can choose this option to get financing for up to $500,000 and more. In addition, short-term alternative business loans are preferred more than bank loans and medium terms loans due to shorter repayment terms and quick access to funds.
However, this type of financing option has a higher APR. Thus, if you are proceeding forward with this option and considering to repay the loaned amount in full within 12 months, do not focus on the APR. It is recommended to look at the total cost of capital. For instance, a cheaper option might be to repay the loan in six months and 40 percent APR than in four years and 6 percent APR.
If you are a business that requires fast cash and can easily repay the loan within 12 months, the short-term business loan is the right choice for you. Moreover, if you have been in business for quite some time, providers may approve your application and transfer the funds within a few days so that you can take care of time-critical financial needs. It does not matter whether you have a good credit score or not, short-term alternative business loans will help you get funds at the earliest.
There are multiple purposes of equipment financing, including purchasing equipment, machinery, vehicles, and more. As it is classified as an alternative lending option, businesses do not have to worry about minimum credit requirements. Instead of a lease, equipment finance is more referred to as an equipment lease that also offers flexibility in terms of monthly repayments.
Businesses who are in need of purchasing or upgrading their equipment, but do not have sufficient funds, turn their attention towards equipment financing. Moreover, small businesses and startups are also eligible for the alternative business loans as the equipment purchased will itself serve as a collateral. As a business owner, if you are not in debt and looking to consider other financing options for equipment purchases, this is an ideal option for you.
Invoice financing is also known as invoice factoring that provides businesses with quick funding to cover B2B and B2G customer invoices. Over the years, many small businesses and startups chose invoice financing over other alternative lending options. Why? The financing option converts all the due invoices of 30, 60, and 90 days into immediate cash so that businesses can easily and optimally function. Any lender will provide 80% upfront funding while the remaining 20% will be funded once the invoice is paid.
Businesses that have outstanding invoices of over a month or so can choose invoice financing as one of the alternative business loans to get immediate financing. The only condition is that the invoices should belong to B2B or B2G customers. Further, businesses who do not have a good personal credit score can rely on invoice financing as this option is more dependent on the creditworthiness of your customer, and not yours.
A line of credit or short-term loan used to buy or bulk up inventory is known as inventory financing. Depending on the type of business, you can secure the alternative business loans with the inventory you purchase, business asset, or existing inventory. This is a cheaper option when compared to options discussed above.
As a business, you might have to meet immediate inventory need – and in case you cannot wait or are unable to qualify for a bank loan, inventory financing is the right solution for you. We all know that bank loans can easily take up to three months or more – from approval to transfer of cash. It does not matter whether you are a wholesale or retail business looking to bulk up inventory quickly. It can also be used by seasonal businesses to purchase inventory for an upcoming period.
Merchant Cash Advances
Another alternative business loans, which is not considered as a loan, is a merchant cash advance. MCAs are typically based on a business’s current and future credit card receipts instead of credit score and other traditional factors. Regardless of being an expensive financing option, small businesses and startups that have been in business for over six months are eligible for a merchant cash advance.
The best thing about merchant cash advances is that it helps businesses to gain quick access to fast cash. In addition to this, the repayment terms are flexible as well that vary as per the credit card sales and receipts generated on a daily or weekly basis.
If you are a business with poor credit score, the risk of bankruptcy, tax liens, or outstanding debts, MCAs are an ideal option for you. In the past few years, more small businesses have preferred merchant cash advances over other alternative business loans.
Why is MCA better than other alternative business loans?
There are several reasons why merchant cash advances gained immense traction in recent times over other alternative lending options. Let’s narrow down the options that make MCAs a better option and where other financing options cannot compete it:
- Amount offered: When compared to other options, merchant cash advance provides a higher amount. Although it depends on the average monthly sales volume of your credit card, most lenders would be willing to offer nearly 90% to 250% of the monthly credit card sales volume.
- The time required: Most businesses prefer MCAs to other alternative business loans due to its quick and efficient process. Businesses have to submit an application online, which will be accepted by the lender in a matter of hours or so. In many cases, businesses have received funding in a few hours to take care of immediate financial needs.
- Eligibility criteria: The qualification and eligibility criteria vary from provider to provider. Usually, if you are in business for over six months and have been generating $10,000 or more in credit card sales, you are good to go.
- Application process: MCA is best known for a type of financing that requires the least paperwork in order to get funding. All you have to do is apply online that takes a couple of minutes and the lender will only review your business account to see if they can provide you with the funding or not.
- Documents required: Unlike conventional bank and alternative business loans, MCAs only require recent merchant credit card statements, tax return, and bank statement.
Things to consider before applying to alternative business loans?
Conventional bank loans will always have an edge over alternative lending options due to the low APRs. However, banks cannot offer higher approval rate, flexibility in terms of repayment, and easy process to get funding. The overall idea to get funding remains the same, but alternative business loans, such as merchant cash advance have only made it simple for businesses to get access to funds.
- Higher than usual loan amounts: It goes without saying, whether or not you qualify for a bank loan, the only reason you would prefer alternative lending over others is because of high loan amounts. Even though the lenders cannot match the value banks can offer, that is usually possible for established businesses only, it can get small businesses roughly six-figure loans to get off the ground.
- Easy eligibility criteria: Merchant cash advances and other lending options have easier eligibility criteria when compared to traditional banks. It is known how frustrating it is for a business owner to start the process only to find out that they do not meet the minimum eligibility criteria.
- Flexibility: Alternative business loans offer flexibility when it comes to repayment and other options. This is not possible if you go for a bank loan as they are quite stringent with the processes and policies.
• Fast turnaround: Majority of the alternative lending options have quick application and fast turnaround so that you do not have to wait to cover your financial requirements. For instance, with MCAs, you can apply and get approved for funding within a matter of minutes and hours. This is feasible when compared to traditional bank loans.