The US Chamber of Commerce spoke to several entrepreneurs about their most significant business challenge. You guessed it; financing took the top spot.
True, there were other obstacles, including building brand awareness, recruiting, and pricing models. But, the larger percentage agreed that an inability to access capital was a major challenge.
The article goes on to highlight some interesting insights. Traditional bank loans can be tough to obtain. Such institutions are not willing to take the risk of lending to an entrepreneur.
Some lenders are unwilling to give loans below $100,000 due to profitability issues. For a startup, it places an unnecessary burden of borrowing more than they need.
Businesses that do not have tangible assets also face some challenges. Lack of collateral can be a significant stumbling block.
It is not all gloom and doom, though. Non-traditional or alternative lenders have stepped in to save startups. Read on to find out which options are available for startups.
Why Alternative Lending Options Work
As stated above, startups may not always be welcome in traditional lending institutions. There are many limitations they must overcome to access funding.
Alternative lending options have stepped in to save the situation. They typically offer financing facilities online.
Let’s look at some alternative lending options.
- Online Lending Platforms
Online or digital lending platforms are becoming more popular every single day. A Bloomberg report projects that by 2027, the platforms could reach $20.31 billion.
As of 2019, the global lending platforms were at $5.58 billion. With the projections, we are looking at a compound annual growth rate of 16.7%.
Such platforms are ideal for startup business loans for a number of reasons. We can summarize them as follows.
- Quick Access to Cash
Online lending platforms are fast and reliable. The most obvious advantage is that everything happens online. You don’t have to spend hours in a banking hall, waiting for a face-to-face consultation with the loan officer.
The application process takes minutes. In under 24 hours, you could get funding ranging from $500 and above.
Business owners get access to a wide range of business financing products. These include equipment financing, invoice financing, term loans, and much more.
- Less Rigidity in Requirements
Traditional loans need a lot of proof of your creditworthiness. You will, for instance, need a good credit score. You can, therefore, expect a credit check from the lenders. You can still qualify for bad credit loans but will pay high-interest rates. The bank may also need collateral before availing of credit.
Online lenders only need basic information about your business. This includes business registration and confirmation of monthly revenue. The online lenders could also need to know that you have a physical location for your business. The time you have been operating will also be important. A minimum of 3 months is the typical threshold.
The lenders may not insist on credit checks, so there will be no effect on your credit score. Having a good credit score will not hurt, though.
- Flexible Repayment Terms
Online lenders offer greater flexibility with repayments. It is possible to negotiate for weekly or bi-weekly payments. Depending on the loan amount, you can also spread the payments to up to 2 years.
The type of loan you take will also determine the repayment. Term loans, for instance, typically have shorter repayment periods of a year or less. However, it does not mean that you cannot negotiate with the lender for longer terms. The flexibility makes it more manageable for borrowers to keep up.
- Business Lines of Credit
Alternative lenders can avail business lines of credit to startups. Why is this a good idea? In our introduction, we talked about banks not being willing to give below a certain amount. If you want the funding, you must take what they offer.
The disadvantage is, whether you use all the money or not, you must still pay the interest on the total amount. It can make loan facilities very expensive for entrepreneurs.
A business line of credit is very similar to a standard credit card. The online lender sets a pre-approved limit. You can then draw whatever amount you need, as long as you do not surpass the limit.
Reputable online lenders will be clear about pricing, meaning no hidden fees. It gives you more control over what you borrow. And, the interest applicable is only on what you use. So what are the benefits of a business line of credit?
- Revolving Credit
Borrowers get revolving credit and higher limits by maintaining a good repayment record. That way you will have cash whenever you need it.
- Borrow What you Need
As we stated, standard loans make you eligible for the full amount you borrow. With business lines of credit, you only draw what you need. The interest amount is only applicable to what you take.
- Inventory and Invoice Financing
A business that deals in tangible products will need inventory. Sufficient stocks are especially critical if you deal with seasonal products. Imagine selling winter clothing and running out of stock when most people shop for them.
Inventory financing will allow you to store bulk inventory well in advance. When the season rolls around, you can be sure of filling the necessary orders.
Unpaid invoices can be the collateral you need to get financing. The lender will avail cash, which you pay back once the customers settle the invoices. Such loans provide a way to navigate when the business could be facing cash flow issues. So why should you consider such loans?
- You Avoid Dipping Into Cash Reserves
A business needs to maintain cash reserves at all times. Yet, it can be tempting to use such for buying inventory or when facing cash flow problems. Inventory and invoice financing can tide the business over such times.
- Opportunity for Business Expansion
Equipment and inventory are critical for business growth and expansion. Having a source of financing for such expenses allows the company to take advantage of such opportunities.
Final Thoughts
Alternative lending options are available to startups. It is a relief because you don’t have to deal with traditional banks. Family and friends can be a source of cash. But for the sake of relationships, treat them as a last option.
Online lending platforms are pretty popular nowadays. They offer quick access to cash and are pretty flexible. Borrowers also get a wide range of financing options depending on their needs.
