Alternative lenders are private companies that perform similarly to the lending arm of a bank. Because these lenders usually operate an online-only business front, they can focus on providing streamlined, quick, and flexible financing services. While they often have higher interest rates than traditional loans, there are a variety of payment options and loan requirements, making it an accessible solution for small businesses that need a quick loan for a capital boost.
1- Working Capital Loans
If you run a seasonal business with stark differences in profits at different times, you may need help covering operational costs. A working capital loan helps fund short-term day-to-day costs.
Pros
With these loans, you retain all business equity. Also, these business loans generally do not require you to put up any collateral.
Cons
If you cannot pay this loan on time, that may negatively impact your business’s credit score. Plus, sometimes collateral is required putting assets at risk.
2- Merchant Cash Advances
Merchant cash advances are simple. You reach out to a merchant cash advance lender. They offer you a lump sum of capital in exchange for a percentage of profits you receive from credit card payments.
Pros
There are no fixed payments when you get a merchant cash advance. You agree to pay a percentage of your credit card-based payments to the lender, meaning what you pay fluctuates with what you earn. This option is a solution to those who need quick cash, and payments are taken from your account, which helps to reduce the risk of costly late fees. These business loans are often credit check free, making it an ideal option for those with bad credit.
Cons
The rates may be too high for your business, and if you don’t consistently receive a decent volume of credit card payments, this option likely isn’t the right fit for you.
3- Professional Practice Loans
If you are a doctor, legal practitioner, or accountant and own a business, then you have a professional practice and can get a special professional practice loan. These kinds of loans are best used in the medical sector as they have higher equipment overhead costs. However, these loans can be used to cover real estate and some insurance coverage.
Pros
The rates are lower than other business loans, and the lenders tend to understand the benefits and risks of lending to a professional business.
Cons
Equipment may become obsolete too quickly, and practitioners may improperly distribute funds to non-core functions. Both of these issues may mean you will need to seek more financing faster than would usually be necessary.
4- Equipment Loans
If you need to fix or get new equipment fast, an equipment loan can get you the working capital you need to cover those costs.
Pros
These loans are secured and easier to obtain than other kinds of financing. While low-interest rates are common, always carefully review loan terms and conditions.
Cons
This loan often needs a considerable down payment, and the equipment may become obsolete before you’ve finished paying off the loan.
5- Business Line of Credit
A business’s line of credit, or LOC, is an amount of cash that a business can use in times of need. It can be secured or unsecured. The secured credit has collateral backing it, while the unsecured options do not. Once a lending limit has been reached, businesses must pay off the balance to receive more funds.
Pros
This is a highly flexible financing option that can help give you a boost right when your company needs it. It can also help the business owner understand and predict lows in the operation cycle. Then you can account for times when cash flow is low.
Cons
However, the interest rates may be too high for small businesses. And overusing the LOC can result in overextending your credit, resulting in further financial issues.
Finding the Best Funding Alternative for Your Small Business
Traditional lenders often have stricter lending parameters than alternative lenders, making alternative lending options a great solution for small businesses that need some quick, working capital, as well as those needing bad credit loans. Consider the options outlined above for financing options that sound right for your situation.