After the traditional lending institutions faced huge regulations, they paved the way for alternative lenders. This industry has experienced tremendous growth rates and it has been a blessing for most startup owners as well as individual borrowers.
The term alternative lender is used to refer to other financial providers that operate as non-conventional finance providers. This industry is teeming with financial products that are designed to address the current market needs. Most importantly, it focuses on a market segment that had been neglected by traditional lenders. Since there are many options to choose from, it is quite crucial that you understand the players.
P2P lending can be loosely defined as a financing option that takes place between peers in the absence of a conventional financial provider. The amount you can borrow is small and the average is about $30,000 with loan guaranteed terms ranging from one to five years.
One of the reasons why these platforms have realized outstanding success is because it relies on the internet and social connectivity. In the online platforms, lenders and borrowers interact and it is common to find more than one credit provider contributing to the same loan request from a peer.
To make the service flawless, the platforms practice verification and identification of individuals as well as determining the creditworthiness of borrowers in order to estimate the risks. Since the operation takes place online, the costs are quite low meaning borrowers can get favourable rates and lenders can get better returns.
Online business loans
Most lenders offering online business credit can give you up to $250,000 and the interests are determined by the risk you carry as well as projected business growth. Typically, the loans are paid back in about one year and most of them don’t require collateral. As such, it is a popular option among borrowers since you don’t have to risk your valued assets.
The applications are quick and paperless with instant lending decisions. If the request is approved, you can get the funds within three days but there are those who can fund the loan in one business day. Online business loans are popular with startup owners, especially those dealing with e-commerce, service industries and anyone without sufficient assets to acquire a bank loan.
Nevertheless, every entrepreneur should do a sufficient background check to make sure they understand the fees. Most importantly, it is wise to compare several options and determine which one offers the best deal. This will ensure you don’t face exorbitant fees in the future.
When using crowdfunding, startups request for small amounts from a large pool of contributors through online platforms. They leverage the internet and run a campaign pitching a multitude of followers to make contributions towards a certain goal. If your audience is convinced, they will make donations.
Unlike in a normal borrowing scenario, the money raised doesn’t need to be repaid. Instead, the contributors get a service or product as a token of appreciation. Normally, the reward system is tiered and higher contributions attract a reward with more value. However, some crowdfunding models can offer the contributors a certain share of revenues generated from future sales.
This option has gained popularity due to its efficiency and tendency to provide funds quickly when compared to conventional channels. At the same time, you get the opportunity to convey your brand to potential clients. With sufficient planning, this form of borrowing involves a low risk and it is quite useful for new startups as well as developmental products.
Factoring and revenue-based financing
If you run a business that handles a huge amount of invoices, it is possible to tap into your pending invoices and get some money for your business. Here, you can get up to 90% of the outstanding balance but the specific rate is determined by how long the account has been unpaid. Your financier inherits the invoices and is therefore tasked with the responsibility of collecting the money from the customer.
Revenue-based funding helps you get some money and you can later pay back a monthly amount that is determined by business revenue. Here, the entire revenue stream is factored in but the interest rates may be higher. Nevertheless, you get the opportunity to access business financing without using collateral.
This form of funding is also referred to as business advances and is issued based on projected credit card sales. Here, the financier buys a certain amount of prospected credit card purchases for your business at a discount which can be anything between 20%-30% of the total amount you will receive. Your business is given some cash long before it generates income and the advance provider will be collecting a percentage of your credit card sales up to the point when the debt has been repaid.
This funding option is advantageous since the repayments are based on a predetermined percentage of sales. As such, there is no specific time when you should clear the balance and if your business is seasonal, you don’t have to worry about monthly payments. Nevertheless, your business may be required to have a certain volume of sales as well as be in operation for about six months.
While there are many alternative lenders in the market today, some are still new to this industry and it is prudent to understand how they work. Nevertheless, this also means that you have more options to choose from if you want to get the best lending deal.