Alternative lenders are often under-utilized by new business owners, in part because there aren’t many personal credit equivalents to tools like asset financing, so they seem less familiar. There are also some perceptions of alternative lending as riskier, which is a myth. The fact is, any source of financing other than a traditional bank loan counts as alternative financing, including any private money loans from investors looking to back loans. It’s a very broad category, and while there are some products that are more expensive than others, that’s true of traditional loans and credit tools as well. Alternative credit tools bring their own unique structures and requirements, giving them a unique set of benefits that often serve the borrower well in cases that traditional loans were not designed for.
Less Emphasis on Credit History
There are three ways to control risk when lending money. The first is to use a credit report to see what the borrower’s repayment history looks like, so you can gauge the likelihood of late payment or default. The second is to take collateral, securing the loan or credit line to an asset that can be seized and resold in the event of default. The last is to increase the cost of capital, making the loan profitable to the lender in less time and decreasing the chance of losses due to default before the principal is recouped by investors. Alternative lending tends to put a lot less emphasis on that first part, in favor of one of the other two. This can make it expensive when you’re looking for unsecured debt, but secured debt can be both accessible and cost-effective if you have the collateral.
Fast Approval and Cash Distribution
Since there’s less emphasis on credit histories in the approval process, it’s easy to streamline applications for alternative lending. You still need to show income and asset values, and there is usually a quick credit check because credit scores do still factor into loan costs, but there is no long preparation and review process for a business plan because alternative lenders understand their products are being used for short-term working capital, filling a niche left open by the structure and approval process for traditional loans. Often, this means a week or less from the time you start an application to the time you get your cash advance. In some cases, it’s even faster.
Use Your Business Assets
The last major benefit of alternative lending is the ability to use business assets beyond real estate and equipment equity. Your merchant account, inventory, and invoices are also resources you can command for accessible short-term financing. That’s a huge benefit for smaller companies that rent their facilities.