The Advantages of Alternative Financing for Small Businesses
Many small business owners have been through the loan application process in the past. They know how frustrating it can be when the bank turns you down. That’s probably why alternative financing has gotten a huge surge of attention. Small businesses are turning to alternative funding methods for large purchases and day-to-day needs. How can this type of funding help?
A quick look at the main requirements for most bank loans is enough to discourage anyone. For business loans, traditional banks want to see a credit score of 650 or above. They expect business owners to have several years operating successfully with considerable annual revenue and immaculate cash flow. Even stranger, applying for a loan that is too small (under $250,000) can actually get you rejected faster!
It can seem like the deck is stacked against small business owners. In this situation, alternative financing is like a breath of fresh air. The requirements are much simpler to reach. Some loan options are available for startups and companies with poor credit. Others look at the value of the equipment you want to purchase instead of your company’s finances.
Many alternative lenders don’t even base their judgment solely on financial qualifications. They also look at the business owner’s experience, dedication, and determination. A good investment is a good investment, regardless of past credit problems.
The extensive vetting process of conventional loans can drag on for many weeks or months. Some SBA loans or business loans take 90 days or more before you hear back. That makes it hard to take advantage of business opportunities.
Alternative funding is uniformly fast. For example, real estate businesses use bridge financing to buy properties in a few weeks. Sales businesses turn to invoice factoring or lines of credit to get working capital in 24 hours.
Comfortable Interest Rates
A common misconception is that alternative financing has higher interest rates than bank loans. That’s generally not the case unless your business has near-perfect credit. For the average small business, alternative lenders offer similar interest rates as the bank, but with far more flexibility.
Even better, many alternative loans are customized based on the specific circumstances of the business applying. For example, if a business operates on a seasonal time frame, alternative financing can adapt payments to match. If a business needs a low monthly payment, it may be possible to accommodate by having a larger down payment, or vice-versa.