The Advantages And Disadvantages Of Alternative Lending
The advantages of alternative lending platforms vastly outweigh the disadvantages. Securing a loan from a bank is difficult and time-consuming, and usually ends in rejection if you have a limited credit history or lower score.
By comparison, alternative lending platforms are a reliable solution designed to help your business to prosper. Below is a brief overview of the alternative lending industry, products, and the pros and cons of each.
The alternative lending industry has vastly improved the ability of small businesses to access critical financing. Unlike banks, online lending delivers an easy and quick application system for any small business.
Business loans from banks are known for their rigidity. Loan amounts, use, and repayment schedules are fixed, and any deviation can result in fees and penalties. Unlike the rigidity of banks, alternative lending platforms offer loan terms from as short as three months to five years.
Alternative lenders provide flexible loans that meet your unique needs. You can choose from short-term, secured, or unsecured business loans, microloans and bridge loans, equipment financing, or lines of credit.
For instance, part of Kabbage business loans and financing activities also includes working capital lines of credit. You receive approval for a certain amount and do not pay anything until you have drawn funds from the credit line. You decide how much and how frequently to use the line of credit.
With a flexible loan from an alternative lending platform, you decide how to use the money. Funding Circle, another popular online lender, offers flexible loans for small businesses designed to cover cash flow gaps, buy equipment, or pay your bills.
When you have cash flow issues or need to move quickly to purchase inventory, expand facilities, or launch a new branch, you need financing without delay. The traditional bank process can take a few months from start to finish. Most banks have an online portal for completing the application, but you still need to meet with the lender. Assuming you are approved, it can take weeks before you see the money hit your account.
Alternative lending platforms shorten that timeline so that you can access the money you need when you need it. Utilizing fintech and algorithms, online lending platforms can quickly analyze your credit score and cash flow. They also use non-traditional metrics such as customer reviews to quickly review your application. Your request is processed as soon as it is submitted. You will have an answer within a few hours and the money in your account within a business day.
Easy Application Process
Applying for a small business loan from the bank is a complicated process. The application form is lengthy and requires attachments such as your business plan and financials. Bank lenders look for excuses to turn down your loan request, so any mistake in the application can result in an easy rejection. You need to read the application form carefully to avoid errors. There is a lot of small print, particularly when explaining your APR and repayment protocols.
Alternative lending takes place online. There is no hidden language or small print. Everything is clear and easy to complete. Since everything is online, you can apply at your convenience. A good example is the Fundbox business loans platform which is especially easy to navigate. You can have no credit, be a new startup, or only a few months old. Everything is transparent, making it difficult to commit errors. Best of all, there are no surprises.
Because alternative lending platforms take more risk, they do come with a few disadvantages such as higher interest rates and installment payments.
Higher Installment Payments
Traditional bank loans come with longer terms, meaning that your monthly installments take less of a bite out of your operating budget. Most alternative loans come with shorter terms. The shorter the term, the higher your monthly payment.
Higher installments put a strain on your cash flow, especially if you are a new business and have many financing priorities. Moreover, some alternative lending platforms require payments more frequently than monthly. This is especially true if you have received a merchant cash advance from an online lender.
Higher Interest Rates
In general, you can probably secure a business loan from the bank at a more competitive interest rate. Because of the large volume of loans that banks process and stricter qualification requirements, banks can offer lower interest rates.
Alternative lenders provide you with a speedy, easy application process. Therefore, you can expect the interest rate on your business loan to reflect the less stringent eligibility criteria. They process fewer loans and take more of a risk, a fact that is reflected in their interest rates.
Alternative lending platforms also consider your credit score, and if you have excellent credit you can obtain a loan with a more competitive interest rate. Fundbox business loans come with interest rates between 10.10% – 79.80%. Funding Circle’s online term loans carry interest rates between 12.18% – 36.00%.
Alternative lending offers far more benefits to small businesses than the disadvantages that are associated with these streamlined financing options. Alternative lenders utilize cutting edge financial technology and artificial intelligence to quickly process your loan application. You can even have no credit or bad credit and still qualify for a business loan, helping finance critical expenses and growth.