A Look into Alternative Lending for Business Working Capital
For a very long time, banks were the only institute that could provide sufficient loans not only for a startup but also for businesses that have been running for a while. While this was more controlled, the biggest disadvantage was that if they refused to give a loan, there wasn’t a second option through which one would acquire the finances to help them run the business. However, the good news for business owners is that banks are now not the only lenders.
There are numerous options that can help businesses find the funds they would need to start and grow while completing their strategic goals.
The advantage of this additional platform for lending is that businesses have a wide range of options out of which they can choose the one that is the most desirable for them and that they can get the most out of.
What Is an Alternative Lender?
All non-bank lenders come under the category of alternative lender.
While most loans of bigger businesses are approved, small businesses have to face rejection when it comes to bank. It has been found that around 80% of banks reject any loan application they receive from a small business owner.
Alternative lenders, on the other hand, are a lot more flexible to new business owners. Moreover, the application is processed and approved a lot faster, and business owners can get both small and large loans.
Working Capital Loans
Out of a lot of alternative lending options, one is for the working capital of a business. When you are running a business, at times, you feel that the need for cash has increased along with the growth of the company. Sure, you might have a lot of inventory that you are going to use soon or you might have a large order that you would be fulfilling and expect to get the payment soon, but you are still putting a lot of strain on your cash flow due to the fact that you actually don’t have any cash. All the cash is on your balance sheet as account receivable.
Here, the working capital loan comes in to help which looks at the assets that your company has and all the future income that you are going to receive and are now in the form of account receivable. You would, thus, be allowed to borrow the money that would be enough to cover the daily expenses of your company.
How the loan works is that the alternative lenders take into account your receivables and take them as leverage against which they provide loans so that the funding is secured. This is especially helpful for any company that is supposed to fill a large order but wouldn’t be paid until the order is completed or at a later date. With working capital loans, the company would be able to stay in operation and cover its operation and manufacturing expenses and expenses related to the acquirement of raw material. This way, it would be able to carry on with its business and can receive the payment when it is due without a hassle.
Why Is Getting an Alternative Working Capital Loan Beneficial for a Business?
What you are borrowing from an alternative lender is what you would need for the operation and to complete the order. This means that all you are borrowing is what you would have at the end due to the fact that you would receive your payment. This makes the transaction fairly risk-free because you would pay back as soon as you receive your payment for a certain order. This way, any worry of an additional payment to pay banks usually for months is not present in a working capital loan.
How Does Your Credit Score Affect Your Alternative Working Capital Loan?
The credit history of your company has very little effect on the process and approval of the loan. Instead, what the lender is interested in is the fact that how much you are going to earn and how soon your receivables would turn. Moreover, they are interested in the customer base of your business and the structure of the business.
If you can show the lender that you can meet their demands consistently and have the capability of collecting your orders on time, you would be able to qualify for a working capital loan with alternative lenders with quite ease.
Is Choosing Alternative Working Capital Loan a Better Option Than Opting for Bank Loans?
The problem with working capital is that a company has to have some all the time. This means that waiting for months for banks to process the application and approve it is out of the window. This process generally takes a lot longer because banks, to be safe and have minimum risk, take their precious time in examining each and every small detail of the business and its finances before sending the application to the next step of the process.
This means that the capital you need for the daily expenses is not available to you. Without that capital, you can’t operate and, thus, won’t be able to complete your orders.
However, the good thing about an alternative lender is that they understand that as soon as you get the working capital, you would be able to operate properly. This means that you would be able to complete your orders quickly and receive your payments on time. This implies that if you have taken the loan from an alternative lender, you would be able to pay them back quite quickly. Thus, their main objective is to see that your business grows, and they have no interest in the debt to income ratio of your company.
The other thing that makes alternative lending a better option than a bank loan is the collateral that is asked from businesses. Banks want to stay safe. This is the reason why they would not take your promise to pay them back as soon as you receive your payment as a valid promise. They would need actual security for the loan that they might provide to you. Therefore, they would ask you to put a tangible asset like the inventory of your company, land of the company or even your personal house as collateral.
The alternative lender, on the other hand, asks for no such thing. What they are more interested in is whether their customer has the capability to pay them back by putting their trust in the owner, who believes that they would get their account receivables turned into a payment really soon. For an alternative lender, your faith in your customer is a sort of collateral in itself. This can be considered one of the biggest benefit that alternative lending has over conventional bank loans. Hence, with alternative lenders, this is another worry that can be put to rest.
Is There Any Catch?
This might not affect large business owners, but for small business owners, there is a slight catch to alternative lending. Where banks provide slower processing and approval time, they also provide a lot lower interest rate for the creditor. However, this is not the case with alternative lenders, who have been known to charge a relatively higher interest rate from their customers.
Moreover, the borrower has a lot shorter window of repayment and, thus, have to make their loan payments quite frequently. Thus, instead of a monthly payment, a business owner might be asked to pay the premium every week.
Some of them even have a problem with maintaining their solvency due to the fact that they have a lot more flexible terms than what were actually required.
The interest rate of alternative lending loans usually depends on quite a number of factors. Some of them are, but not restricted to, annual revenue of the business, how long the business has been running, credit score of the business and the kind of loan that the company is looking for.
The business of alternative lending has been going on for quite some years. If it were not for the fact that the lenders operate with integrity, the lending would have stopped a while ago. These alternative lenders have one goal, which is to help small and medium businesses grow and prosper.
If your needs are for a working capital, you would find that the option of an alternative working capital loan is a lot more preferable as compared to the conventional loans that banks provide as the former gives a lot more flexibility to the borrower and the processing and approval of the loans is a lot faster than bank loans. This is exactly what a business owner requires if they want to have a working capital in their hands for continued operation of their business.