With their high approval rate, ease, and speed of access to funds, and flexibility of terms as compared to traditional loans, alternative lending is slowly becoming more popular among individuals and small business owners. Approximately 45 million Americans have credit records that are either too minimal to be scored or are entirely credit invisible.
Alternative lending is an excellent choice for such loan seekers with a poor credit history. The lenders use alternative data to check for the creditworthiness of applicants such as:
- Mobile phone payment
- Credit card activity
- Rent payment
- Bank account activity such as transfers, withdrawals, and deposits
- Social media activity
- Cable TV payment
These lenders make obtaining finances much easier. But the field is largely unregulated compared to the banking sector. Borrowers who have no chance at securing traditional loans can be exploited with hefty interest rates.
Understand and evaluate all available options depending on your needs to avoid exploitation. Options give you power. Study the loan documents carefully with the help of a legal counsel. Understand the rate, fees, and terms of the installment loan before committing.
Here are the different types of alternative lending you can access based on your needs.
Lines of Credit (LOC)
LOC is a product whereby you get access to a large sum of money from which you can withdraw on need basis and return the rest. You only pay interest on what you borrow.
You can get asset-based LOC depending on the value of your assets or unsecured LOC; which is suitable for start-ups with few assets and no credit history. But unsecured LOC comes with a higher interest rate.
It is an excellent source of credit for situations when you need funding, but you don’t have an exact amount. It is also a reliable safety cushion for emergencies and times when you are low on cash and need some help with expenses.
P2P and B2B Lending
Peer-to-peer lending is a marketplace where individuals take unsecured loans from other individuals. It cuts out the middle-man, which is the bank, making the interest rate affordable. Examples of company websites providing this platform are Prosper, Lending Club, and Peerform.
Business-to-business operates similarly to P2P, with businesses receiving funds from online investors at an affordable rate. It is an easy source of capital when seeking to expand the business or invest in other areas such as real estate. Companies that offer business loans include OnDeck, Prospa, and Fundera.
Merchant Card Advance (MCA)
This is a kind of funding available to new business owners or businesses with bad credit history; especially those that banks are unwilling to fund. The merchant cash advance provider offers the amount of cash you require in advance. Repayment is set as a flat percentage of sales. This is done daily or weekly until the full amount plus interest is paid.
An MCA installment fluctuates with the level of sales; unlike the traditional bank loans where the installment is a fixed amount paid over a set period. Companies that offer MCA include Kabbage, lendio, and Ondeck. People are often warned to be cautious with MCAs due to their high interest rates, but a
2016 report by deBanked and Bryant Park Capital indicated that 91.7% of small business owners continued to have confidence in the merchant cash advance industry.
Statistics on statista show that crowdfunding is the most used form of alternative lending worldwide. Crowdfunding is where individuals post their business ideas or goals online and request for funds. Investors and other people then give money towards the achievement of these goals. Examples of crowdfunding sites are Fundable, Kiva, and Kickstarter.
Crowdfunding can take four forms: debt, rewards, equity, and charity. For reward-based crowdfunding, instead of returning the money, you offer to give something in return.
Equity-based crowdfunding enables entrepreneurs to acquire finances in exchange for equity in the company. Charity-based crowdfunding is where donors fund a charitable cause for no gain.
If you need to fund a personal project and your credit score is a hindrance to obtaining the traditional loan, it is possible to acquire funding based on household income, savings, investments, and real-time cash flow. The funds can help with career development, making major purchases, home remodeling, and events like weddings. You could also use personal loans to fund business start-ups. Companies that offer personal loans are such as SoFi, Upstart, and Earnest.
For companies that need finances but have their money tied up in unpaid invoices, invoice factoring can be a saver. The invoice factoring company purchases the unpaid invoices, pays up to ninety percent of the total amount owed upfront, collects the payments and sends you the balance, less a factoring fee. It takes off the burden of following up on debtors and provides instant cash flow. Since the invoice factoring company’s concern is the customers with pending payments, the credit score of the business is never a hindrance to obtaining the finances. Such companies include Paragon Financial Group, Bluevine, and TCI Business Capital.
When it comes to invoice financing, it involves getting funds by using unpaid invoices as collateral. The financing company offers a line of credit depending on the unpaid invoices. Collection of the debts from customers remains the task of the business. It is an excellent alternative to invoice factoring for business owners who need funds but are not open to third parties handling their customers. Invoice financing is also cheaper compared to invoice factoring. Companies that offer this financing option include Fundbox, Bluevine, and Payability.
To purchase equipment needed for a business consider an equipment loan. In this case, the asset acquired acts as collateral and thus the business’s credit history or cash flow is not of concern to the lender.
With an equipment loan, you can quickly obtain vehicle, machinery, and electronics needed to run your business smoothly. You can get an equipment loan from crest capital or currency capital. Traditional banks have also resulted in partnering with alternative lenders to offer loans to small business owners at a fast and efficient manner. The technology of the online lender neutralizes the traditional loan process.
The partnership between J.P. Morgan and OnDeck Capital is an excellent illustration, where Chase Business Quick Capital gives small business owners access to as much as $200,000 in loans using OnDeck technology. The application process takes minutes. The bank releases the funds as early as the following day.
Alternative lenders are a great replacement of traditional loans for business owners and individuals with a poor credit history. They use alternative sources of data to assess creditworthiness and process loans fast making them a reliable source of emergency loans.
You can use assets to obtain an asset-based line of credit and equipment loan. You can also get a loan based on expected future sales, or unpaid invoices through MCAs, invoice factoring, and invoice financing. There is also the option of obtaining loans from your peers, micro investors, or other businesses through B2B, P2P, and crowdfunding platforms.
By understanding the various options, you have before making a decision; you might never have to deal with the hassle of traditional bank loans again.