Financing has never been a piece of cake for startups and aspiring businesses. However, the new trend where small businesses are opting for an alternative lending source has completely transformed their fate. While many funding options are available for businesses to choose from, but a non-traditional loan may not be a viable option.
Before a business commits to a financial relationship with any party, it is extremely important for them to know and understand the pros, cons, opportunities, and threats that are associated with such a collaboration.
As per the United States Small Business Administration, alternative business loans are increasingly important for small-scale businesses, as they make up 99% of the companies in the US. Furthermore, they provide 55% employment opportunities and govern 54% of the overall sales.
Today, alternative lenders have raided the industry to capitalize the opportunity at hand. They are constantly striving to meet the needs of small businesses by ensuring stable working capital. Technology is now being incorporated into the system where digital tools and machine learning is being vastly used to offer credit to the different small businesses at a fast and efficient pace.
These companies specifically facilitate those businesses that have been rejected by banks for loans. On the other hand, lending companies for small businesses offer a digital platform that coherently connects various small businesses with lenders that use nontraditional funding means.
It is believed that alternative business loans providers have started to form partnerships with the banks to help startups and small businesses. Many people claim that this move is becoming the driving force going forward. The recent financial partnership between JPMorgan and OnDeck is one of the most sought after in the alternative lending industry. By 2020, it is expected that this move will add 7.7 percentage points to the alternative lending industry’s market share.
The transition from banks to alternative lenders
When we talk about the small business economy, the only thing that can drive it forward is quick access to capital. Every business, whether big or small, needs an extra infusion of cash, now and then, to manage business processes efficiently. If business owners are unable to get access to working capital, they will be unable to grow or expand their companies. In most scenarios, it is difficult for small businesses to secure conventional bank loans, although, banks insist they will provide business loans to all those small companies and startups who qualify.
Initially, the conventional loan options accommodated small businesses and extended financing to business owners and entrepreneurs. The number has significantly gone down as more businesses are now opting for alternative business loans. Wall Street Journal reported that the volume of loans to small businesses had been reduced by more than 38 percent, since 2006.
Thus the question arises, why big banks do not want to offer small business loans to companies. The only thing that stops them from providing loans is profitability. Large lenders do not consider this option profitable for themselves, and the nature of their business does not allow them to offer loans of less than $1 million. This amount is significantly higher than what most of the business owners and entrepreneurs require or qualify for.
This is the primary reason why small businesses are making the transition from banks to alternative lenders. The trend is changing, and alternative lenders are more than willing to facilitate the needs and requirements of small businesses and startups. Whether they need $1 million or less, alternative financing lenders will do it for you!
When we talk about trends changing, it was an impossible task to get a loan application approved via an online form until 2015. Now almost every other alternative loan provider will accept your application. The processes are now automated, and the majority of it happens online.
Alternative Business Loans – Merchant Cash Advance!
In recent times, Merchant Cash Advances or MCAs have become a more viable option for small businesses and startups. Those who are looking to gain access to fast cash are opting for MCAs. Alternative lenders, such as MCA providers are here to bridge the gap in the financial marketplace. This way, they are not only offering numerous benefits to small businesses but are doing enough to earn themselves profits as well. The process which conventional loaning options deemed as unprofitable, alternative lenders are earning profits on such loans.
According to analysts, it is all because of big data that has allowed MCA providers and other alternative lenders to earn profits from small business loans – a market, commercial lenders do not want to touch. Modern-day lenders are using big data technologies to evaluate the future of the company and creditworthiness. After determining bank account activity, credit card activity, future credit card sales and receipts, and earning deposits, they decide if it is a viable option to offer loans to those businesses.
This has enabled Merchant Cash Advances to be much faster than conventional loaning options. Their lending decisions are based on data-driven insights. It is believed that it takes a few days to few weeks to approve and transfer loan by MCA lender. Whereas, commercial lenders take weeks and months just to approve the application.
Why are small businesses preferring alternative business loans over conventional loans?
There are many reasons as to why small businesses and startups have started to rely on alternative lenders whenever they are in need of some extra ‘moolah.’ If you are a business owner or entrepreneur of a small business or startup, here is why you should choose it:
When it comes to alternative lenders, your application will be approved within a matter of days. Initially, small businesses faced difficulties in getting a loan if their credit history was poor. Commercial lenders have strict regulations, and they have to comply with it while deciding who qualifies for a loan.
In contrast, it is quite easy to get cash advances through alternative lenders. If your business accepts debit and credit cards, you are most likely to be approved for an MCA. Why? The lender is providing you the amount you need in return for your future debit or credit sales. Thus, the lender is not worried about you not repaying the loaned amount at all.
If you have taken loans from a bank or commercial lender previously, you would know how crucial it was to make monthly payments or payments after a certain date. In case you miss a date and forget to repay the agreed weekly or monthly amount, you will get hit with heavy ‘late payment’ fees.
If we talk about Merchant Cash Advances specifically, you will not only get cash advances but flexibility as well. In addition, you do not have to remember the deadline dates anymore. The repayments are automatically scheduled and depends on the debit or credit card sales your business has made for that month. If your business is doing well, you have to pay more. In bad times, you are not obligated to pay higher or a fixed amount. The repayment will vary as per the sales completed.
MCAs eliminate the complications businesses had with conventional bank loans. The APRs and final payoff amounts were a burden on business owners. Many people wanted to pay off the loan as soon as possible so that they save on interest.
This is not the case with alternative business loans. Before agreeing to a deal, you would know the final amount needed to be paid off to the lender. Furthermore, either you pay the loan early or at your convenience, it has no advantages or disadvantages. The process is simple, and you should know what to expect from merchant cash advances.
COLLATERAL NOT REQUIRED
In almost every case, commercial lenders required collateral in the form of personal or business assets. In case you missed payments or failed to pay off the entire loaned amount, it may result in significant loss for you. Most of the alternative loan options are unsecured loans, and they are less likely to ask for any collateral from your end.
TIPS FOR SMALL BUSINESS OWNERS
As a small business owner, there are several things to consider before finalizing an option:
Carefully evaluate your options
Whether you want to go for a conventional loan or alternative business loans, it is a serious financial decision. To secure a business loan from a commercial lender, it is not as easy as compared to MCAs. Thus, evaluate options carefully and do not accept the very first offer you receive from a loan provider.
Understand rates and terms
Irrespective of approaching a traditional bank or alternative business loans for your financing needs, it is increasingly important to learn about the various loan policies, rate, fees, and then get the requisition evaluated with the legal counsel before you sign a deal.
Which is a better option – bank loans or alternative business loans such as MCA? Although the situation for which you need finances is different, Merchant Cash Advances is something you should definitely consider if you are a small business owner.