Don’t let the name fool you; alternative business loans are very mainstream. As technology evolved, platform lenders emerged to fill a business financing gap that existed for the more than 80 percent of small businesses that could not qualify for big bank loans. While these financing tools are often referred to as alternative business loans, the advantages they offer could make them the first choice for small business owners.
How Alternative Business Loans Fill Key Financing Gaps
- High Approval Rates
According to a NSBA 2012 Small Business Access to Capital Survey, 43 percent of small business owners said they needed but couldn’t find financing sources at some point during the four years previous. Most businesses qualify for at least one (and often several) types of alternative business loans, in part, because they are available to young as well as established businesses. Most companies need to exist for two or three years in order to qualify for a working capital loan from a bank; however, young businesses are often those most in need of small working capital loans.
Alternative loans are available to businesses after they have been in business for just a few months, unlike bank loans which are often available only to companies that have been in business for several years. Overall, lending requirements for alternative financing programs are generally significantly less stringent than for traditional loans, and are often based on nothing more than projected sales.
- Application Requirements
The application process for bank loans and peer-funding models can be particularly onerous while the application for an alternative business loan can usually be completed online and may only take a few minutes. Since many are based on the most recent six months’ deposit or sales history, there is very little (or no) additional documentation business owners are required to supply.
In addition, while traditional lenders often require business owners to provide proof of assets (called collateral) as guaranty against a loan, alternative loan approvals don’t hinge on collateral. Nor will a low credit score preclude approval for alternative financing, though a low credit score may result in automatic disapproval for a bank loan.
- Time to Funding
It takes the average business a week just to hear back from the bank about their credit application (Bank of America 2015). However, there are many times in the course of the life of a business when it might need access to working capital immediately. Equipment failures, payroll shortages, fast-developing business opportunities and other situations can crop up and demand immediate action.
Time to funding may be the most significant advantage of alternative business loans, since time to funding could be minutes from the moment an application is submitted. At most, small business owners can expect alternative financing tools to provide access to working capital within a few business days of approval. Traditional lenders application and underwriting processes can be lengthy, taking weeks or even months. For business owners that need immediate access to working capital, waiting simply might not be feasible.
- Renewable Resource
Most alternative business loan programs give borrowers the ability to renew funding and some even allow business owners to draw against and up to a given credit amount on demand. This type of financing could be especially appropriate for long term projects or when a business owner foresees that cash flow highs and lows might present a challenge.
- Flexible Use of Funds
Financing that comes from banks, grant programs and peer-lending programs is often project-specific. Meaning, funds can only be used for specified purposes. Business owners may even be required to submit periodic reports showing use of funds. Alternative business loans are far more flexible and most allow the business owner to use funds at their discretion. For this reason, alternative financing could be preferable to other options, especially when a business owner needs working capital that can be applied as-needed or be used to support multiple areas of operation.
- Short-Term Solutions
The median amount banks loan out to small businesses is $130-140k (SBA 2013); however, small business owners often need working capital loans in much smaller amounts – amounts that are often below the threshold of consideration for traditional lends. Alternative loans range from as little as a few thousand dollars up to $100k or more, once again filling the gap left by traditional lenders.
Every type of business financing has pros and cons that might make it more advantageous in one situation or another. When it comes to alternative loans, it is essential to consider the benefits that can be provided for small businesses. Alternative loans can be a strong option as they have the ability to fill gaps and offer small business owners working capital financing tools that can bridge short term cash flow lows and fund growth.