United States
Updated: December 11th, 2023
Long gone are the days when banks were the only suppliers of capital. Business owners have more options than ever for business financing. Today, you can borrow upfront cash or credit through alternative lenders in addition to traditional financial institutions like banks and credit unions.
Keep reading to learn more about the benefits of alternative lending and tips for finding the financing solution that works best for you.
Traditional bank loans have long been a common source of funding for individuals and businesses alike. However, they come with a range of issues and drawbacks that can make the borrowing process less favorable for certain borrowers.
Here are some key issues associated with traditional bank loans:
Banks often have strict eligibility criteria that borrowers must meet in order to qualify for a loan. These criteria may include factors such as credit score, financial history, and collateral. This can make it difficult for individuals with lower credit scores or limited credit history to secure a loan, excluding a significant portion of potential borrowers.
The traditional lenders approval process can be lengthy and cumbersome. Borrowers typically need to provide extensive documentation and financial records, which the bank then thoroughly reviews. This process can take several weeks or even months, which may not be suitable for borrowers in need of immediate funding.
Many traditional loans, especially larger ones, require borrowers to provide collateral as security against the loan. This means that borrowers need to pledge assets such as real estate, vehicles, or other valuable items. If the borrower defaults on the loan, the bank can seize these assets, which poses a significant risk for borrowers.
While interest rates for a traditional bank loan can be competitive for borrowers with good credit, they can also be quite high for those with lower credit scores. Additionally, banks may charge various fees, such as origination fees and prepayment penalties, which can add to the overall cost of the loan.
Traditional financing often comes with fixed repayment terms and schedules, leaving borrowers with limited flexibility to adjust their payments based on changes in their financial circumstances. This lack of flexibility can be challenging for businesses that experience fluctuations in their cash flow.
Physical presence is often required to initiate the loan application process with a traditional financial institution. This can be inconvenient for individuals or businesses located in remote areas, leading to restricted access to financing options.
In light of these issues, borrowers are increasingly exploring alternative financing options that provide greater flexibility, accessibility, and transparency compared to traditional bank loans.
Alternative lending is lending that occurs outside the banking system. Banks have historically had high eligibility requirements for their borrowers. Alternative business lending emerged as a way to give business owners easier access to capital.
Though there are a few different types of alternative lending, the term usually refers to marketplace lending, which is the practice of connecting borrowers and lenders through online platforms instead of through a bank intermediary.
There are three major types of alternative lending solutions:
Online lenders are the most common type of alternative lenders. Online lenders are true to their name: they’re non-bank lending companies that offer financing online.
As with a traditional bank, online lenders supply capital or credit to qualified borrowers, set repayment terms, then charge interest. However, with online lenders there’s no brick-and-mortar establishment to visit. All alternative business loan applications, customer service interactions, and fund transfers happen digitally.
Online lenders vary from lender to lender, but most of them specialize in one or two financial products and pride themselves on fast turnaround times.
Want to learn more about online lenders? Check out these FAQs.
Crowdfunding platforms give business owners a way to raise money directly from their communities—without having to borrow alternative business loans from a lender. On platforms like Indiegogo and SeedInvest, you create a business page or profile, share your funding needs, set a fundraising goal, then ask people for contributions.
The advantage of crowdfunding is that you can appeal directly to friends, family, and community members who want to support you financially. Plus, you get a chunk of capital interest-free (though you do have to pay a portion of proceeds to the crowdfunding platform you use).
The catch, however, is that most crowdfunding platforms only give you the money if you meet your ultimate fundraising goal. Otherwise, this alternative lender gives you nothing and you’re back to square one.
Another type of alternative lending is venture capital fundraising. Venture capital firms and angel investors lend money to promising startups in exchange for equity in their companies.
The draw of venture capital is that investors have a lot more money to spend (think: millions). However, most venture capital firms and angel investors are looking at startups in specific industries (like tech or healthcare), rather than working with small business owners.
Here are four compelling reasons to consider alternative lenders over traditional banks.
The primary reason business owners turn to alternative lenders is because they need easier access to capital. Banks are notorious for having rigid credit qualifications (looking for credit scores of 680 or higher), while alternative lenders tend to be more lenient with their small business loans.
The average online lender wants to see a credit score of at least 600, though some online lenders allow lower scores as long as you meet other criteria (like having a history of steady cash flow or consistent revenue growth).
Plus, while banks generally don’t lend to businesses that have less than two years of experience, many online lenders consider small businesses with just six months of operating history.
Need to improve your credit? Here are five ways to raise your credit score.
Using online lenders gives you more options for sourcing the business financing you need. Online lenders, for example, specialize not just in term loans and business lines of credit—they also offer SBA loans, equipment financing, invoice factoring, merchant cash advances, and microloans.
A business owner can do their own research on different types of financing and different online lenders to find the solution that best suits your unique needs.
Online lenders typically have straightforward loan applications, plus the process is more condensed than at a traditional bank. You can usually check your credit score for free before applying. From there, you upload a handful of business and financial documents (like recent bank statements and profit and loss statements), fill out a one-page form, then click submit straight from your mobile device, monitor, or tablet.
With a bank or credit union, on the other hand, you often have to fill out an initial application form before having a phone call with one of the bank’s loan officers, then submitting a pile of paperwork (including a business plan) and attending a meeting or interview in person.
Online lenders are all about efficiency. Many online lenders use a combination of experienced underwriters and advanced underwriting software to expedite the application review and loan approval process.
That means you can hear back from some lenders in as little as a day, compared to the weeks or months that many banks take to sort through and underwrite their loan applications.
Despite its many advantages, alternative lending through online lenders isn’t a perfect solution. Online lenders don’t usually lend as much money as banks do, so you might not get the full amount of funding you need to achieve your goals. Plus, online lenders typically have higher interest rates and shorter repayment terms than banks, which can make it tricky to budget.
That’s why it’s critical to research your online lending options to ensure you’re choosing a reputable company that aligns with your business needs. Make sure you look at an online lender’s standard loan terms, hidden fees, APR, and customer reviews.
Online lending might be right for your business if:
At Funding Circle, we pride ourselves on a transparent, efficient, and flexible financing process. Our small business term loans, business lines of credit, and SBA loans are designed to get you the financial support you need to thrive.
If you qualify for our gold-standard business term loan, you can borrow anywhere from $25,000 to $500,000 with repayment periods from six months to seven years. The best part? You get a fixed monthly payment, no confusing fees, and no prepayment penalties ever.
Ready to learn more? See if you qualify or apply now.
Paige Smith is a content marketing writer who specializes in writing about the intersection of business, finance, and tech. Paige regularly writes for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.
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