Why Alternative Lending Could Be Your Path to Cash

Getting access to more capital to operate or grow your small business can become a crucial factor in your company’s success, whether you’re looking to expand, buy equipment, add inventory or just smooth out cash flow issues.

And luckily for small business owners, the options to access cash keep growing, particularly in the alternative lending marketplace.

Alternative funding has become a popular option to traditional brick-and-mortar banking institutions, where loans often involve credit and collateral requirements and an overall process that can prove daunting (and unsuccessful) for some small business owners.

Alternative funding is made up of the non-traditional forms of lending money to businesses and entrepreneurs: online private lenders, social lending, person-to-person lending, microfinance and microloans.

Alternative Funding Benefits

You may pay a slightly a higher interest rate with alternative lenders than with a traditional bank loan but overall the alternative funding route is attractive to small business owners because it offers faster access to cash, more flexibility and less paperwork. 

According to the online financial marketplace Fundera, alternative lenders have triple the acceptance rate of their traditional banking peers when it comes to small business funds, accepting on average between 61 and 64 percent of small business owners looking for funding, compared to the big banks’ approval ratings of between 13 and 20 percent over the past five years.

“Online alternative lenders use complicated algorithms to underwrite your loan applications quickly, software to scan your business’s financials and sync with your accounting files, and even social media accounts to take some non-traditional sources into account,” the Fundera website explains. “Some work like traditional lenders, while others have peer-to-peer models and secondary markets, too.”

Here’s a peek at a few examples of alternative funding resources for small businesses:

Digital Lenders

Digital lenders use automated platforms to qualify small businesses for lines of credit and loans. For example, the Atlanta-based Kabbage provides small businesses access to lines of credit up to $250,000 by analyzing their real-time business data via its platform – a process it says takes just 10 minutes.

Kabbage reported loaning more than $2 billion to small businesses in 2018, ranking it among the top 5 digital lenders, according to The Financial Brand, a publication aimed at senior-level executives in the banking industry. 

Paypal tops the publication’s Top 5 list of digital lenders, with OnDeck (No. 2), Square Capital (No. 4) and Amazon (No. 5) rounding out the list.

Because these lenders “have access to transaction history of sellers on their platform – and often use that merchant’s sales data instead of a credit score – they can quickly determine the credit worthiness of a small business borrower,” writes Jim Marous, co-publisher of The Financial Brand. “Comparably, banks and credit unions usually only have access to a small business’s deposits and bank accounts, unable to see the entire picture of a company’s sales.”

Crowdfunding

Crowdfunding is the process of gathering funds through philanthropic small time supporters, with startups and small businesses using sites like Kickstarter or GoFundMe. 

It’s a popular method in niche markets or to fund a specific project or launch a new product. For example, an entrepreneur about to open a coffee shop in an up and coming neighborhood reaches out to the community for startup funding. Or, a small movie theatre owner used crowdfunding to get his longtime patrons’ help with cash flow issues. 

P2Ps

Peer to peer lenders or P2Ps use a marketplace to create financial options between individuals, as in “peers,” connecting entrepreneurs and small business owners to loans without traditional banking protocols or the intermediation of a financial institution.

The P2P platforms do not lend their own funds but act as facilitators for the borrower and the lender – an individual investor or institutional investor, such as a hedge fund or investment bank.

Investopedia lists CircleBack Lending, Prosper Marketplace, Upstart, Lending Club, StreetShares and Funding Circle as the top P2Ps.

Microfinancing

Microlending, or microfinancing, connects online lenders to entrepreneurs to offer smaller loans – doled out in increments as low as $25 or loans as high as $50,000 – to businesses and entrepreneurs who wouldn’t typically qualify for a traditional or larger loan. 

Microlender Kiva offers loans of up $10,000 to U.S. entrepreneurs. There’s also Accion and Grameen America, which distributes microloans to low-income women entrepreneurs. The U.S. Small Business Administration also offers microloans, up to $50,000.

Mostly nonprofit organizations, microlenders often focus on underserved populations and some offer other types of support available as well, such as education and training or help with business plans and marketing strategies.

The SBA

The SBA has options that give small business owners and entrepreneurs who may not have the credit history or revenue to make a loan worth it for a traditional bank an improved chance of being approved – because the SBA is guaranteeing your loan. 

The SBA’s popular microloan program is aimed at new business owners and entrepreneurs in underserved populations, including women, minorities and veterans.

Another popular option from the SBA is its 7(a) loan, the monies from which you can use for general working capital needs, such as refinancing debt and buying inventory for your small business.