Insights Jan 23, 2017

Why Alternative Lending Works

Denial from a traditional lender is not a slammed door for small business owners and commercial investors. The surge in alternative lending has paved the way for borrowers to access essential funds to launch a startup or expand their business. Investment ventures are finding alternative lending possess several attractive benefits when compared to traditional funding sources.

1) Alternative Lending is More Flexible

Unlike a traditional bank loan, the alternative lending market has few, if any, regulations. Alternative lending comes from non-bank institutions allowing the lenders to set their criteria when approving borrower financing, scheduling repayment, and in loan amount. Some programs like the SBA Microloan Program do have documentation requirements, but crowdfunding is an open-ended funding source that may not require payback. The variance in requirements means alternative lenders tend to accept between 61-64% of small business requests for funds, compared to the 58% approval rate at traditional big banks.

2) Alternative Lending is Diverse

There are more funding types available through the alternative lending model. Merchant cash advances provide easy access on future credit or debit card sales. Term loans are more similar to traditional financing, with a lump sum repaid in years with defined terms and an APR. Sale-leaseback programs allow borrowers to “sell” their assets to a borrower and lease it back for a period time, helping build their capital while maintaining possession. Other types include, but are not limited to, revenue-based financing, purchase order financing, and peer-to-peer lending.

3) Alternative Lending is Convenient

It’s hard to beat alternative lending for its speed. Traditional bank financing requires a lengthy application process with approval weeks or months from the application start date. Alternative lending offers reduced paperwork requirements and translates to faster access to funds. Online lending marketplaces make alternative lending even more convenient. Borrowers can complete applications in under an hour and receive funds within days.

4) Alternative Lending Adapts to Borrower Needs

For businesses facing a sudden need or emergency, alternative lending is the way to access quick cash to bridge the gaps. Borrowers can use alternative forms of collateral, like outstanding invoices or equipment. Just need $10,000 for capital investment? Alternative lenders are more willing to make smaller loans. Repayment terms can be negotiated to fit the borrower’s needs rather than adhering to a strict schedule.

5) Alternative Lending Supports Small Business

Traditional banks view small business as a risky investment. Since the Great Recession, the amount of loan funding for commercial ventures has decreased from $700 billion in 2008 to $600 billion in September 2015. Alternative funding rose to fill in the gap for the unbanked or underbanked. Alternative lending is friendlier to borrowers with a poor or limited credit history that would be denied a traditional bank loan. For business owners with successful track records, it’s easier to secure lines of credit because alternative lending is less hassle.

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