The Best Alternative Lending Options for Small and Medium-Sized Businesses in 2022

Most small and medium-sized companies have encountered the pain of working with conventional finance institutions when seeking loans, whether for starting funding, refinancing, growth, or operations requirements. For small and medium-sized businesses (SMBs), this article will discuss some of the greatest alternative funding choices.

Loans are being revolutionized due to the union of finance and technology (FinTech). Businesses that want access to cash may now receive it via online platforms that link lenders and borrowers based on technology-based matching. A new generation of alternative lenders (usually individuals or groups of investors seeking large returns) is filling the hole left by the collapse of conventional lending institutions. Business to business (B2B) lending is another term for alternative finance, also known as peer to peer (P2P) lending.

Compared to 2014 ($11 billion), the alternative finance sector in the United States more than quadrupled in size between 2014 ($34 billion) and 2016.

What Are the Benefits of Alternative Lending? Alternative lending options have many benefits.

Flexibility- Online platforms make it simple for borrowers to shop around for the best interest rates, periods, maturity dates, and other features.

Instantaneous response- Alternative finance might be arranged within a single day. On the other hand, banks might take weeks or months to accept loan applications, mostly due to complications with collateral assessment. The paperwork requirements for bank loans are much higher than those for other funding sources.

Less severe qualifying standards - According to estimates, banks routinely reject three-quarters of all small company loan requests, preferring to lend primarily to well-established enterprises with strong credit ratings. Alternative lenders do not have the same strict lending criteria as traditional lenders. As a result, they are considerably more likely to give loans to new businesses or organizations with lower (or no) credit ratings. Some alternative lenders have loan acceptance rates as high as 95%.

In the absence of a substantial company or personal assets as security, banks are hesitant to provide funding to a business owner. If the firm is solid and can show the capacity to make repayments, alternative lenders are far more flexible and often grant loans without security.

Are There Disadvantages to Using Alternative Lending Methods?

Greater interest rates - Alternative lenders seek a higher rate of return in exchange for faster approval procedures and fewer eligibility conditions. While banks may provide company loans at annual percentage rates (APRs) ranging from 4 per cent to 10 per cent,
alternative lending rates vary from 13 per cent to 70 per cent.

Increased costs - Some alternative lenders tack on additional fees hidden in the loan agreement's small print. Borrowers would be advised to review any such arrangement before signing it thoroughly.

Prepayment choices are limited - Banks are often more lenient than alternative lenders regarding early repayment. All alternative lenders do not offer prepayment reductions.

What Kinds of Alternative Lending Are There to Choose From?

B2Blenders provide term loans comparable to that of banks and other financial organizations. Fundera, an online loan broker, is a good example of this kind of company. Fundera does not provide loans; instead, it connects lenders and borrowers, charging a fee ranging from 1.5 to 3 per cent of the loan amount as a match-making service. Term loans with payback terms ranging from one to five years are available for up to $500,000 in total. Lending Club, Prospa, and OnDeck are just a few firms that provide business-to-business loans.

Equity-Based Crowdfunding is a kind of crowdfunding in which investors invest their own money in a company's stock.

Cash raised via equity-based crowdfunding platforms allows entrepreneurs and startups to obtain early-stage capital in return for ownership interests in the company. Shares are priced by the total number of shares outstanding and the anticipated worth of the firm, and they are distributed to investors on a proportionate basis. Individuals, angel investor organizations, and venture capitalists are examples of investors. Crowdfunding systems such as AngelList, CircleUp, Fundable, Localstake, MicroVentures, OurCrowd, and AppsFunder are examples of such platforms. Instead of increasing ownership via debt financing, entrepreneurs who prefer to keep complete control of their firms may find that giving up equity reduces their ownership.

A line of credit is a kind of credit facility.

Business lines of credit are often utilized to bridge short cash flow gaps, meet seasonal credit needs, provide emergency liquidity, or take advantage of unanticipated changes and opportunities. A line of credit with a lender may be opened and funded at any time (up to the borrowing limit), and interest is collected on a daily average of the outstanding amount, which is normally determined based on the average daily outstanding sum. Interest rates may vary according to whether the firm is established, the credit score, and other factors. They may vary from 7 per cent to 25 per cent or more. Start-ups and enterprises with weak credit ratings may be required to post collateral. Note that making good use of a credit line may be an effective strategy to significantly grow or raise one's credit score. Fundera, as well as a slew of other online lending platforms, offers business lines of credit.

Invoice financing is a kind of financing that allows you to borrow money against your invoices (also known as Invoice Trading or Invoice Factoring).

When a firm borrows money based on the value of its outstanding bills (up to a maximum of 95 per cent, depending on the industry and creditworthiness of the business), the unpaid invoices are used as collateral to secure the loan. Invoice financing is beneficial for businesses that do not want to wait for their bills to be paid in full. Fees vary significantly from lender to lender, necessitating extensive research. Vendors that provide invoice financing include Fundera, Platform Black, MarketInvoice, InvoiceFair, and others.

Merchant Cash Advances are loans that allow businesses to borrow money from other businesses (MCAs).

Businesses are given money in return for a percentage of future sales, known as a "merchant cash advance." In most cases, repayments are made by daily or weekly debits from the business's bank account or through credit card sales until the advance is completely paid off. Because of the high-interest rates and expenses associated with them and the absence of incentives for early repayment, MCAs are often unsecured and have less severe qualifying standards. RapidAdvance, Credibly, and Fora Financial are just a few examples of MCA service providers.