What Are Alternative Lenders?

Whether you’re starting a new company or growing an existing one, you need financing to take the next step. Traditionally, it’s been challenging for small or newly established businesses to get loans from banks and traditional lenders. Newer companies don’t have a credit history and smaller businesses often don’t have much financial clout.

In recent years, an alternative to traditional bank financing has become available. Alternative lenders operate outside of traditional financial institutions. In some cases, they can be what your company needs to get funding for its next phase of growth. A virtual CFO can help you weigh the pros and cons of working with alternative lenders and decide if it’s the financing option your company needs.

What Is Alternative Lending?

Alternative lending is any type of debt financing that occurs outside of a traditional bank or financial institution. Often, alternative lending takes place over an online loan marketplace or peer-to-peer lending site.

Traditional lenders often require a lot from companies that want to obtain a loan, such as a lengthy credit history, proof of income or revenue, and a business plan. Alternative lenders usually have looser requirements, making it easier for less-established businesses to get a loan.

Examples of Alternative Lenders

Alternative lenders can take many forms. One example is a private investor who offers to loan companies money, rather than take an equity stake in the business. Perhaps the most common example of alternative lending is a peer-to-peer lending platform.

Peer-to-peer lending platforms connect companies in need of financing to investors who are willing to provide the funds. In some cases, several investors might contribute to a loan through a peer-to-peer lending platform, dispersing the overall risk of the loan and making it more likely for a company to get the funding it needs.

Benefits of Alternative Lending

Compared to traditional lending, there are multiple benefits to working with an alternative lender. Perhaps the biggest benefit is that a company is more likely to get the financing it needs if it goes through an alternative lender. If a bank has rejected your company’s loan application, you may be more likely to get approval from a peer-to-peer platform or through another alternative lender.

You also have options if you work with an alternative lender. You can choose a term loan or apply for a line of credit, depending on your company’s funding needs. Invoice factoring, which provides an advance on unpaid invoices, is another example of alternative lending.

The process is often faster when you work with an alternative lender compared to a traditional bank. You’re more likely to get approved for your loan more quickly and to get the cash you need faster.

Potential Risks of Alternative Lending

Any type of financing, whether debt or equity, has its risks. The same is true for alternative loans.

Usually, the interest on alternative debt financing is higher than the rate charged by traditional banks. Traditional financial institutions are a lot more selective about who they extend credit to. Their selectiveness allows them to offer low interest rates, as they have done the credit checks and verified that a business’s financial foundation is solid.

Since alternative lenders often provide funding to companies that aren’t eligible for bank financing, there’s more risk for the lenders. Alternative lenders usually pass on those risks in the form of higher interest rates.

You often have less time to repay an alternative loan than you would a traditional bank loan. A shorter loan term reduces the risk to the lender, as borrowers are more likely to repay loans with shorter terms compared to loans with longer terms. But the risk to your company is greater, as a shorter loan term usually means higher monthly payments.

The more you have to put toward debt repayment each month, the lower your cash flow, which can affect your company’s ability to make other moves.

Should you work with an alternative lender? A virtual CFO can help you review your financing options and choose the one that will best meet your business needs. To learn more, hire your vcCFO from New Direction Capital today.