Why alternative business lending?
Banks have not been a reliable source of small business lending. Bank regulations determine the amount of risk they are able to take on, and this limits their ability to loan to small businesses. Research has shown that banks reject around 75% of small business loan applications. This is after the small business loan seeker has gone through an arduous application process required to get a bank term loan.
In addition, as a result of the 2018 Banking Royal Commission, banks have further tightened small business lending. Given the poor odds of getting a business loan, more small businesses are turning to non-traditional business lenders when they want to improve cash flow or increase working capital.
Here are a few alternative business lending options that are filling the gap for small business.
Although banks offer equipment finance, a growing number of non-traditional business lenders are specialising in this form of alternative business lending. Equipment finance is usually short to medium term – usually three to five years. Equipment finance is available for a range of purposes, including manufacturing, hospitality, medical, dental and more, and some specialised lenders focus on one particular industry, such as providing loans for restaurants and cafes.
With many forms of equipment finance, the equipment purchased serves as collateral. If the borrower can’t make payments, the lender can take the equipment and sell it to get the funds they are owed.
Learn more about equipment finance.
Merchant cash advances
Merchant cash advances are usually offered by alternative lenders who specialise in this form of finance. With this form of alternative business lending, the borrower gets a lump sum payment and repays the loan automatically through a portion of credit card sales. The lender collects an agreed percentage of the daily credit card sales until the loan, plus a premium, is repaid. A major advantage of merchant cash advances is that they provide quick access to funds without collateral. One of the disadvantages with this form of alternative business lending is that premium can be high – sometimes an interest rate over 30% when calculated on an annual basis.
Keep in mind that merchant cash advances are only suitable for businesses with a large amount of credit card transactions. Businesses that make a lot of cash sales or invoice their customers are not suited for this type of alternative business lending.
Find out more about merchant cash advances.
With invoice finance, businesses needing funds can borrow a percentage of the value of their receivables. Before making the loan, the lender will evaluate the quality of the outstanding debt and determine that percentage it can lend. The lender charges fees and interest on the amount borrowed.
Invoice finance comes in a range of forms. Sometimes the lender will take full control of the receivables and collect the outstanding debt. In other situations, the borrower will still be responsible for collecting its receivables.
One of the main shortcomings with invoice finance is the high interest rate. Even though funds are borrowed for a few months, while invoices are being paid, the annual interest rate can be quite high when you calculate it annually. Also, if you don’t have a large number of outstanding invoices, invoice finance won’t be a suitable option for you.
There are various forms of invoice finance, including factoring and invoice discounting, which are offered by non-traditional business lenders. This form of finance is an alternative to a line of credit or business overdraft.
Get more details on invoice finance.
Business credit cards
Business credit cards are one popular form of business lending. For an established business, it’s simpler to get a business credit card than to get a business term loan. In addition, most credit cards have an interest-free period (usually 55 days). This means the business can use the card for expenses and not pay interest if these charges are paid back within this interest-free period. The main drawback with business credit cards are the high interest rates. If you carry an ongoing balance, you can end up paying a large amount of interest for the products or services you purchase using the credit card.
Unsecured business loan as an alternative form of business lending
Unsecured business loans are a form of alternative business lending that’s growing in popularity for several reasons. First, you don’t need collateral for unsecured business finance. Second, the process of getting unsecured business loans from non-traditional business lenders is much simpler than getting a bank term loan.
Fintech lenders, such as Moula, have a simple online application process. The application for an unsecured business loan from Moula takes around 10 minutes to complete and a decision on providing the loan is usually made within 24 hours. So you could be approved for an unsecured business loan within one business day and have the funds in your bank account the next day.
The loan term can range from a few months up to three years. With a fixed interest rate, not a variable interest rate, loan repayment amounts will not change.
Learn more about unsecured business loans.
For a comprehensive overview of business loans and other business lending options, read our Complete Guide to Business Loans.