Small and medium-sized businesses often struggle to secure bank loans. It primarily happens because banks need to see consistent cash flow, a robust debt-to-income ratio, and sizable collateral.
Any and every loan obtained outside a banking institution is a source of alternative lending. These sources are far more accessible and offer greater flexibility.
While they do charge higher interest rates, they are also more accommodating when modifying schedules.
Read on to explore the world of alternative lending.
Alternative lending boasts a broad scope. You can pick whichever type of alternative lending is best suited to your business and industry.
As a small or mid-sized business owner, you might have to encounter a lack of cash flow at times. Unfortunately, it mostly happens since customers take way too long to pay their dues.
In such a situation, alternative lenders provide advance funds secured by unpaid invoices. They typically offer about 85% of the value of these invoices upfront and the remaining after the customers pay up.
If you’re looking to secure money with this method, ensure that you clear the terms beforehand. Quite often, people use the terms invoice financing and invoice factoring interchangeably.
Equipment financing, also referred to as equipment loans, are loans granted for the sole purpose of investing in better equipment.
In these situations, lenders usually provide 100% of the value upfront. The equipment that you purchase with these funds then serves as collateral.
You must be careful with paying back such loans since a default could mean losing your equipment.
Peer-to-peer (P2P) loans are secured via P2P lending platforms, also known as funding circles. These circles are essentially a network of institutional and individual investors.
Think of these platforms as marketplaces for loans. Lenders can choose where they want to invest in diversifying their portfolios.
P2P loans are excellent for entrepreneurs and businesses as they get access to various investors and can secure loans without much fuss.
R&D Advance Funding
R&D advance funding is a unique and relatively new kind of alternative lending. In these cases, the lenders your business’s future tax credit payments as security for the funds provided.
Many Australian companies can access their R&D tax incentives, but the process is very slow, and you need to wait for months before you receive the money in your bank.
If your business invests a lot in research and development, you must check out these loans. An R&D tax incentive loan allows businesses to access their funds within a year.
If you’re having trouble obtaining a traditional bank loan, alternative lending solutions are just the thing for you.
No strict requirements or long-drawn processes are standing between you and your loan. On the contrary, accessibility, flexibility, and speed are the highlights of alternative financing.
The only significant drawback to such pans is that they come with higher interest rates and shorter terms. In addition, the lenders may push your business under pressure to pay back the amount on a monthly, weekly, or even daily basis.