Gone are the days when a small business owner could walk down to their local bank, have a lovely chat with their banker, and walk away with a loan to keep their business afloat. For many of us, those days never existed. The banks we’re familiar with are large multinational corporations highly regulated (due to the history of bailouts) by the government. They are subject to changes in nationwide policy without the flexibility to pivot quickly in response to demand. But they’re still the first option many people think of when it’s time to seek a loan.
Banks must make adjustments in response to economic conditions, just like other financial institutions. When the economy enters a recession, banks necessarily have to pull back, shrinking the availability of traditional loans. They become more selective, approving only those borrowers with top credit scores and securable assets. In many cases, startups, small businesses and fast growing businesses of all sizes are left out of the running.
That doesn’t mean there’s no longer a demand for those loans. It means new lenders come in to fill the lending gap left by traditional lenders. These new lenders are called alternative lenders or “alt lenders,” and they’re the source of billions of dollars in financing annually. The alternative lending sector is only expected to expand in the future, offering viable options to professionals all over the globe.
What are Alternative Lenders?
Strictly speaking, alternative lenders are non-banking institutions. However, the big players in this sector are private market investors. Public pension funds, private investment funds, and private pension funds hold the most private credit assets. Alternative loans can also come from credit unions, peer-to-peer lenders, microlenders, crowdfunding, and FinTechs that loan to private companies. Historically, alternative lenders are more maneuverable than banks because they are lending their own money, not federally backed loans, and they utilize the latest technology available to facilitate the loan process.
Alternative lenders can provide a broad range of financing services like factoring, business credit cards, and ACH loans.
Who Uses Alternative Lenders?
Alternative financing is great for borrowers with non-traditional income such as gig workers and freelancers, but also for businesses that don’t have the credit history to qualify for bank loans. That can mean startups, businesses with sudden growth, past bankruptcies, and those repositioning after the pandemic and interest rate changes.
Alternative lenders use more than just credit reports to underwrite loans. They can look at utility payments, community relationships, and hard assets. Because they use the latest technologies, they can access more types of information faster than traditional lenders. Many alt lenders process applications in minutes, all through their online platforms.
What are Alternative Loans?
In broad strokes, alternative loans are short-term modes of business financing that often rely on assets for security. They typically come with a higher interest rate than a traditional loan. However, since the terms are short, it may mean the business pays less in total interest over the life of the loan.
Factoring is one type of alternative loan that is essentially a sale of accounting assets like invoices and purchase orders. The alternative lender gives the company an advance on the value of these assets so the company doesn’t have to wait around for its customers to remit payment. The customers then pay the factoring firm directly, and the company can bypass this part of their accounting process.
Asset-based loans can be used to buy equipment without qualifying for a credit-based loan. In this case, the asset being purchased – the equipment – acts as security for the loan. The lender mitigates their risk by gaining the right to claim the equipment if the borrower fails to pay back the loan. The borrower can onboard the necessary equipment to advance their business without the capital to fund an outright purchase, regardless of how long the company has been in business.
Those are just a few examples of traditional loan alternatives that are easy to qualify for and address borrowers’ needs by using flexibility and advanced technology. It pays for small business owners to seek out these products when they have capital needs that don’t fit into a traditional paradigm.
How to Get Alternative Loans
Because alternative lenders can be found serving niche communities, they aren’t always easy to discover. Many alt lenders are exclusively online, and it can be hard to tease out the best deals or compare across lenders. Transparency is a point of pride for many alt lenders, who recognize it strengthens the lending landscape. However, there are still a few who aren’t as reliable as they should be.
Businesses seeking P2P financing, microloans, marketplace loans, and similar alternatives have a significant advantage when they work with a broker. Brokers can see hidden opportunities for businesses to capitalize on their assets and take advantage of specialized lenders. They can also act as the borrower’s advocate, negotiating flexible terms that fit the market today, not what the market looked like yesterday.
Because alternative lenders have fewer restrictions than banks, they have more leeway when underwriting. That means there’s room for the borrower to negotiate for a better deal. A broker facilitates this process for small businesses so they don’t pay more than they need to for financing.
While working with a broker is almost always a good idea (even for a bank loan), partnering with one can help business owners identify opportunities for growth in a challenging market when rising interest rates create a gap in traditional lending. Talk with us today and we will help you craft a financing plan based on your business goals and objectives.
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