The Effects of COVID 19 on the Alternative Financing Space
Alternative lending refers to lending practices that happen outside of a traditional banking institution. A few examples of alternative lending would be online lending, or non-bank lenders that operate using a peer-to-peer model. You may have heard of alternative lending also called marketplace lending. Essentially, it connects business owners who are seeking capital with established investors that would like to provide it.
This is the method of most alternative lending. It is either financed by high-net-worth individuals or an online banking institution. Alternative lending loans are easier to come by and are better for individuals and businesses with less than favorable credit histories. They are also counterweighted to conventional assets, provide portfolio diversification, and offer high rewards.
The primary downside to this type of lending is the complex nature, lack of regulation, and high degree of risk for both parties.
How Covid-19 has Affected Alternative Lending Platforms
Alternative lending has flourished during the pandemic. With credit demand surging, loan volume has increased tenfold. Many alternative lending platforms and financial services trends are rising above pre-crisis level as investors have started to realize the benefits of digital lending. The correlation to public markets is almost non-existent when it comes to times of economic uncertainty.
Alternative and digital lending platforms have alleviated credit financing for businesses. They have helped secure the monetary instruments needed to navigate each business’ way through the pandemic, and economic shutdown.
The pandemic has driven out unsustainable lending and brought alternative lending to the forefront. Rather than viewing direct lending as an attractive option, and alternative lending as a risky option, the tables have started to turn. Now is the time to explore alternative lending to facilitate more economic growth.
8 Types of Alternative Financing
Here are 8 types of alternative financing, you or a business can use to secure funding.
Lines of Credit
When you have a line of credit, it is really just a fixed amount of money that you have available to borrow from an alternative lender. This is similar to a line of credit from a bank. You can draw from the line of credit up until you have reached your maximum. You only pay interest on the amount you borrow.
When it comes to the difference between short-term long-term loans, short-term loans are loans that must be paid back within a year or less. Most banks do not offer short-term loans. This is why it is common to obtain a short-term loan from an alternative lender. When your business needs working capital, a short-term loan can be helpful. They can also be helpful to cover a one-time cost.
Installment loans offer a lump sum of money to a borrower, and this is then repaid to the lender in regular intervals. Typically this also involves interest being charged. Many installment loans from alternative lenders will have a specific amount that needs to be repaid. This means that your interest rate will never change. Often installment loans are used to buy real estate, cars, or equipment.
Merchant Cash Advances
When you obtain a merchant cash advance, your business is given cash upfront in exchange for future credit card sales. If you need a lump sum of money quickly, then this is the best route to take. Especially if you make a good amount of income on credit cards and have the receipts. Once the advance is issued, then you must pay it back through daily credit card revenue.
Microloans are loans of $50,000 or less. These loans are offered by alternative lenders because traditional lenders do not offer them. This is a perfect number for small businesses, or a business needing start-up costs. They are often short-term, and some even have a repayment period of a few months.
Invoice factoring is when a business sells its outstanding accounts receivable to a third party, but at a slight discount. Most often you should expect to earn 90% of the value of its accounts receivable upfront. The alternative lender is responsible for collecting the payments, and the 10% discount is offered as “profit”.
Short-term loans backed by an asset, instead of a credit score are called bridge loans. If a business is moving from one location to another, but is still selling the first location, a bridge loan may be used to purchase the new property and cover all closing costs. The new property will then be used as collateral for the bridge loan.
Equipment financing is when you use a loan to purchase equipment your business needs to operate. Although this may seem like a standard loan, it differs in that financing relies on the equipment itself as collateral. This provides the opportunity for lower rates and more application approvals because it is tied to collateral.
Traditional Investments vs Alternative Investments
Alternative lending is not necessarily better than traditional lending, but it offers various advantages. Alternative lending provides the opportunity to use the funding for small to medium businesses that typically do not qualify for traditional loans. It also offers more flexibility, faster processing, and, most often, shorter payment terms.
When you go with an alternative lender, you are also given greater options in the amounts you are able to obtain. Whether you are looking to borrow a moderate amount from an alternative lender along with a standard loan, or simply looking to obtain a loan because you could not through traditional lending. Alternative lenders look beyond a credit score to decide whether you will be approved or not.
Overall, both traditional and alternative lending require some form of guarantee that you will repay the loan. Whether this a good credit history with proof of repayment on loans (traditional lending) or collateral/higher interest rates (alternative lending).
Can I Get an Alternative Loan with Bad Credit?
Some lenders provide lending options to those with bad credit. Rather than look at your credit score, there will be different qualifications. This might include minimum annual revenue, your experience, or have an established business for a few years.
Top Alternative Lending Companies
- Noble Funding: Known for providing invoice financing loans and A/R lines of credit.
- Fintap: Looks at various factors to offer flexible financing options for small businesses, regardless of credit history.
- Fora Financial: Solid funding option for small businesses who wish to take out term loans and merchant cash advances.
- Rapid Finance: Merchant cash advances on up to 250% of your company’s monthly credit card sales. Also grants loans to businesses that have been established for two years and have at least $5,000 in credit card sales each month.
- Crest Capital: Provides equipment financing of up to $500,000 for small businesses. This company has been established since the 1980s.
Fill in the Gaps of Traditional Lending
Obtaining a bank loan is not always possible, but it is not always desirable either. Depending on your business model, there are alternative business lending options that are worth considering. Sometimes your annual revenue is not high enough, your business is just starting out, or your personal credit score has some rocky moments. Anytime that your record is not up to the bank’s standards, you can use an alternative lender instead.
Before choosing who you wish to obtain a loan from, consider it carefully. Always review the terms of the loan and ensure your ability to repay the loan on time. This is always due to your continued success in business. If you are not able to obtain funding from traditional banking institutions, contact an alternative lender to borrow responsibly.