If you own a small business and are thinking about applying for some of the alternative loan options, you probably have a lot of questions. In order to make a decision, make sure to look into these several important advantages and disadvantages of alternative loans and consider what works best for you and your business.
Advantages of Alternative Business Loans
Turning to direct online lenders for business loans comes with several great advantages such as faster turnaround, simplified applications, a great number of loan options, and fewer restrictions.
Firstly, these online lenders all provide an amazing online application that takes just a few minutes to fill. If you were to go for an SBA loan application, it would take you about 30 hours to complete the whole application. Unlike traditional lenders and SBA, alternative business loans don’t require you to provide detailed paperwork in order to prove years and years of your business’s financial history. In most cases, your application can be approved just based on the digital access these lenders will have to your business’s bank statements.
This makes alternative business lenders a great choice for business owners who are too busy to take out hours and hours of their time to file for a traditional loan and take care of all of the paperwork just to sign up. With alternative business loans, you don’t have to worry about that.
If you decide to take a loan from traditional lenders, it will take sometimes weeks and sometimes months for your application to be fully processed. Unlike the traditional lenders, alternative lenders can approve your application and deposit funding within one business day.
That’s what makes alternative loans a much better option for those who need funding quickly or to those business owners who simply have no time to wait for months just to see if their application was even approved.
More loan options
Alternative lenders will offer you some of the traditional types of lines of collateral and credit loans, but they have additional loan options to offer based on your specific criteria like purchases against future receivables and asset-backed financing. These versatile business loans offered by alternative lenders are great for those who need loans of smaller amounts – sometimes even as little as $3,000. In this case, alternative loans offer a great load of flexibility both to those who seek smaller loan amounts and business owners who have assets such as unpaid invoices.
No restrictions on how you use your funds
Lastly, many traditional lenders will ask you to provide a detailed plan on how you’re going to use your funding and there will be strict restrictions on how you can use the money that you borrowed. However, with alternative lenders you will be allowed to use the funding you have been given however you think best suits your business. Just keep in mind that certain types of lending like equipment or inventory financing can be used only for certain purposes, but other than them most other alternative loans don’t have any strict restrictions. This includes merchant cash advances and online invoice factoring and many other loan options.
Disadvantages of Alternative Business Loans
Easier applications process does make alternative loans a lot better than regular ones, but they also pose a big risk to the lenders. For that reason, alternative loans do have a few disadvantages too such as shorter terms, higher rates, and more frequent payments.
Firstly, with alternative loans approval requirements and risk assessment is more lenient than with traditional loans. That is why loan options such as invoice factoring, merchant cash advances and other options have higher fees and rates.
Not all rates and fees are the same though. They will mostly depend on the “health” of your business as well as the type of funding you are asking for. Instead of using the standard interest rate, alternative lenders use something that is referred to as a “factor rate”. To simply put it in words, this factor rate is a decimal figure showing how much extra money you will owe in addition to the original amount. For instance, if you borrow $1,000 and the factor rate is 1.5, you will owe $1,500 in total.
Some of the alternative loan options come with shorter terms. This simply means you will have higher instalment payments so that you can repay the loan in a shorter period of time. For some people this may be a disadvantage but some may prefer it this way.
More frequent payments
Lastly, your payments can be more frequent but that also depends on the type of funding you asked for. For example, merchant cash advances are usually repaid either daily or weekly. It depends on the percentage of your small business credit card sales. These payments are collected automatically. Some other loan options like a line of credit use a more traditional approach to payments.
Now that you’ve gained a more detail insight into both advantages and disadvantages of alternative business loans, you are ready to make a calculated decision.