Alternative lending refers to private companies that offer small business loans outside of traditional banks.
These online-based lenders typically act like an affiliate for bigger lending institutions, providing a range of loan products such as personal loans or business loans with favorable rates compared to those offered by big banks.
Online alternative lenders use algorithms and big data to reduce the underwriting process from 2-3 months down to 3-4 days so that they only require credit scores, income verification (if needed), asset listings, and information about your current bank account to process loan applications.
In this article, we'll list the best financing options of alternative lenders and the different types of alternative loans for small businesses that need financing
What Is Alternative Lending?
There are tons of financial products out there, but not all of them are exclusive to banks. For example, you can get business loans from a bank or an alternative lender (or nonbank lender).
Alternative lending refers to companies that don't have banking licenses but have all the necessary registries and permits to offer loans, so they are as safe and sound of an option as banks.
What Is Online Alternative Financing?
Instead of asking for extensive financial information and paperwork, online alternative lenders use technology.
They pull business information from significant data sources. These sources are often credit bureaus, QuickBooks,
and social media (e.g., Yelp, Facebook). The prospective borrower has to fill out a one-page application form. They also have to provide the latest three months of bank statements.
With this information, online lenders can estimate the business's cash flow. They use the bank statement transaction volume and frequency to underwrite a loan.
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Types of Alternative Lending Options
There are many alternative capital products on the market. Camino Financial
, for example, offers small business loans and microloans.
Short Term Loan
The short-term loan is for small business owners that have immediate cash demand. They also need a quick turnaround in funding. The terms of these loans vary between 3 to 18 months, with interest rates as low as 18% and as high as 50%+.
These alternative business loans
are more flexible for borrowers with suboptimal credit. These loans can be an effective way to (re)establish business credit.
Emerging businesses or owners with FICO scores below 640 could use it. Yet, these loans are cost-prohibitive over the long term.
The intermediate-term loans are for established businesses. They should have at least two years in operation and positive cash flow.
These loans are for medium to long-term cash investments (e.g., equipment, expansion). The terms of these loans vary from 6 months to 5 years. The borrower pays twice a month with interest rates of 8-25%.
Alternative lenders' process is faster than traditional banks. They can also lend up to $500,000 and don't have prepayment penalties.
Intermediate-term loans are an excellent alternative to funding a business. Usually, credit quality standards for these loans are like bank loans. If prospective borrowers have time to spare (2-3 months), they should check with the bank first.
Line of Credit
Lines of credit are like credit cards
. It's a pool of credit available to business owners.
You can use this credit to pay daily or monthly working capital requirements. The big difference is in the payback structure for alternative lending.
They first take the cash from the credit account. As soon as that happens, there is an automatic payback on the principal and the interest. This occurs daily for a predetermined period. You pay fees starting at 5% twice a month, and APRs are 30%+.
While APRs are high, these open lines of credit are accessible to business owners. Even those with suboptimal credit history. They look at the frequency and size of transactions in a business bank account. This helps with the approval of these open lines of credit.
Another benefit is the high credit balance available to business owners ($100,000). This is different from traditional open lines of credit/credit cards.
Merchant Cash Advance
Merchant Cash Advances ("MCAs") are the most flexible. They are also the most expensive alternative business funding product on the market.
MCAs are not loans. They are cash advances against the credit card receivables of a business. The MCA vendor earns a daily percentage of credit or debit card sales until you pay the agreed amount in full.
There are restrictions on the use of proceeds with no personal guarantee required. A key benefit is the simplicity of the application process and the "pay as you go" payment structure. This is ideal for seasonal businesses.
MCAs could be a good source of capital for high return/short-term investments. But they are a costly and risky source of working capital. Their APRs exceed 50%. Also, there is a risk of leaving the business owner with negative income due to their payment system.
is a new financing option for businesses just starting or looking to launch a new product, service, or initiative. Using online platforms, borrowers can raise a small amount of money from a wide net of people.
The business owner would set a funding goal (the amount you want) and market their campaign to prospective investors. Interested investors could contribute to the fundraising goal.
The big downside is crowdfunding campaigns can be very unsuccessful. You have to reach your goal to receive the money you're seeking. As a result, it's very incumbent on you to create a marketing campaign about why you need the money.
The best part about crowdfunding is there is no application process with a lender. This is why it's such a great option for startup businesses.
Peer-to-peer lending is similar to crowdfunding. The big difference is that your funding will only come from one individual in most cases.
You will connect directly with a private individual who will lend you money rather than a financial institution.
Peer-to-peer lenders often charge very high-interest rates because they consider the high investment risk.
At the same time, this type of alternative lending is popular for startup businesses for the same reason as crowdfunding—there's no traditional application process.
Other Asset-Based Alternatives
There are plenty of different forms of alternative capital. Usually, collateralizing some business assets.
These types of loans vary in structure and payment schedule. But, they serve as a reasonable alternative for businesses. In particular, those with limited cash flows or suboptimal credit history.
Types of Lenders
You can consider a few different types of alternative lenders when looking for funding. Here are the main ones.
- Online lenders: These platforms connect borrowers with a network of potential lenders. They're typically more flexible than traditional banks and can offer competitive rates and a good business loan option.
- Peer-to-peer lenders: With this type of lending, individuals can invest in other people or businesses. It's a more direct way to get funding, and you may be able to get better rates than with traditional lenders.
- Microlenders: These organizations typically provide alternative small business loans to traditional financing sources. They can be a good option if you need a smaller amount of money and are having trouble qualifying for a bank loan.
- Crowdfunding platforms: This option allows individuals to pool money together to invest in a project or business. It can be a good option if you have a great idea but need some extra funds to start.
Why are Alternative Loans a Great Option for You?
Traditional bank loans are difficult to get
Larger banks have been moving away from lending below $150,000. This is due to the high costs of service loans and the low collateral value of small businesses.
Besides, small business owners find the traditional bank loan process difficult. Banks have high credit standards and entail significant paperwork. The turnaround is also slow, sometimes taking 2-3 months.
can provide the flexibility that traditional bank loans may not offer. Alternative lending companies may be willing to work with you on customizing loan terms to fit your specific needs and goals.
A traditional bank targets prospective borrowers with a capital need of at least $150,000. Their ideal personal credit score should also be at least 680.
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Alternative loans can be a good option if you have less-than-perfect credit
If you have less-than-perfect credit, alternative loans can be a good option. Many lenders are willing to work with people with bad credit, and many alternative loans are available.
While traditional lenders may require a higher credit score, alternative lenders focus more on your ability to repay the loan. This makes them a good option for those with less-than-perfect credit who may not be able to qualify for a traditional loan.
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Alternative lenders are more quickly than traditional bank loans
Alternative lenders have emerged with a value proposition to address these issues. Alternative lending uses a formulaic approach to pre-qualify loans within minutes.
Throughout the loan approval process, there is less paperwork. Cash flows receive stronger consideration relative to a business owner's personal credit score.
A concern about these alternative lending options is the high annual interest rates
. These range from 8% to 60%+. At these pricing levels, these loans may be cost-prohibitive to small businesses.
Especially when compared to SBA loans that are between 6% and 8%. This is why alternative small business funding may not work for everyone.
But alternative small business funding does
work for many small businesses. In fact, nonbank lenders loaned about $9 billion in 2015. The reality is that the pain points of the traditional lending process are real, which is why alternative lending is an attractive option.
What to Look for When Looking For Alternative Lenders
Here are a few things to look for in an alternative lending company:
A good reputation
You should research the company and make sure they have a good reputation. There are many scams, so you must be sure you are dealing with a reputable company.
The company should be able to offer you the financing you need. They should also be able to work with you to find a payment plan that works for you.
Competitive interest rates and terms
The company should offer competitive interest rates and terms. They should also be willing to work with you to find a payment plan that works for you.
A customer service team that is available to help you
The company should have a customer service team that is available to help you with any questions or concerns you may have. They should also be able to provide you with the resources you need to make sure you are making the best decision for your situation.
Online Financing Is the Best for Small Business Financing
Online lenders often provide the best loan alternatives
, and Camino Financial is one of the top online lenders.
We offer business loans from $5,000 to $400,000 with 24 to 60 months repayment terms and fixed rates.
Our application offers instant quotes (that don't affect your credit score), the best available rates and terms, membership benefits, and the ability to manage your money online. That's why we're one of the best lending companies.
You must complete a short application form
that will only take minutes to get an instant quote. Then you only need to share information about your business and finances with us.
Once you are approved, all you have to do is accept one of the loan terms, and we'll deposit your funds into your account.
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What are some examples of nonbank credit options?
There are plenty of nonbank credit options available to consumers nowadays. Some examples are personal loans from friends or family members, lines of credit from suppliers or vendors, and credit cards.
What is an alternative lender?
An alternative lender is a company that provides loans to borrowers who may not be able to get a loan from a traditional bank.
Alternative lenders typically offer loans to businesses and individuals who have been rejected by banks or who need money quickly and do not want to go through the hassle of applying for a loan through a traditional bank.
How do non-bank lenders work?
Non-bank lenders work by providing loans to people and businesses who don't have access to traditional financing options from banks.
They typically analyze borrowers' creditworthiness using non-traditional methods, such as alternative data. This allows them to extend credit to borrowers who may not be able to get a loan from a bank.
Can I borrow more from non-bank lenders?
Yes, you can borrow more from non-bank lenders. Non-bank lenders often have more flexible qualification requirements and higher borrowing limits than traditional banks.
This makes it easier for borrowers to get the financing they need to purchase a home or start a business.
What is the advantage of a non-bank loan?
Non-bank loans typically have more relaxed qualification requirements, meaning that more people are able to qualify for them.
They also tend to have lower interest rates, which can save you money in the long run. And since there's no bank involved, the process of obtaining a loan is typically much simpler and faster.