Whatever the reason, the need for cash becomes so pronounced that the business owner has no other option than applying for a loan. The first and foremost choice for obtaining a loan is a bank or a financial institution. However, owing to their stringent policies, many businesses are looking elsewhere to fulfill their cash requirements.
Of course, every business owner is looking for the best alternative business loan option that would not only cater to his cash needs but also not become a burden on his daily operations.
The first hindrance to obtaining a traditional loan from a bank or a financial institution is your credit score. If you have a bad credit score, banks and FIs will not entertain your loan application. The good news is that most alternate lenders do not put so much importance on your credit score. They would judge your proposal on other factors like the number of years you are in business, your historical revenue, and the viability of your future business plan.
In this article, we will discuss options for alternative business loans for people who are unable to secure the same through traditional means.
How Alternate Lending Works
Usually, businesses that are unable to secure financing from banks and FIs would turn to alternative loans. Traditional lending generally operates through the internet, contrary to the brick and mortar establishments of banks and FIs.
Discover Your Option for Alternative Business Loans
It must be understood that the basics of the loan does not change if you have secured it from an alternative lender. The loan must be repaid within the stipulated and agreed time frame and should be used solely for the proposed purpose. The object could be anything from fulfilling capital requirements or purchasing raw material.
Alternative Term Loan
A business owner can use this money as working capital of the business. An alternative term loan works the same as the traditional term loan. It must be paid back over the agreed time, along with the accrued interest. The number and amount of each installment depend between the borrower and the lender before disbursement.
A business may experience cash flow problems due to many reasons during its operations. However, one of the most common reasons for this problem is unpaid invoices.
When you provide goods or services to a client, you raise an invoice for the same. This invoice must be paid back within a specific time. If your customers fail to pay the invoice, you begin to have cash flow issues because; you are supposed to use the payment for procuring new material.
When faced with such a situation, the best option for a business is to secure invoice financing. The idea is also known as invoice factoring. Invoice financing or invoice factoring involves selling your unpaid invoices to a company at a discount. The company will take the invoices, and pay you the money. They will charge a factoring fee for the service. Invoice financing is a common practice that is being used by several businesses to plug their cash flow gaps.
Advance against Sales or Merchant Cash Advance
As evident from the name, advance against sales involves selling your future transactions to a lender against cash receipt. The business would repay the loan amount when the actual transaction completes. A pre-agreed amount of fee must also be paid with the original loan amount.
The lender determines this fee amount by considering several factors, including the risk he has to face while working for you. The higher the risk, the higher the fee.
The above means that if you have a bad credit score, you may not opt for this kind of alternate lending because the fee would be higher. And the point to be considered is that the future sales of the company can never be accurately speculated. If the transactions do not happen, the business may find itself in a bind.
Loan for Procurement
A procurement loan allows a business to purchase equipment or furniture for the company. The furniture/equipment bought with the help of this loan itself becomes the collateral against the loan, securing the entire loan amount for the lender.
The traditional lender is hesitant to offer these loans to their clients, but alternate lenders are more than willing to provide the same because their investments are secured.
The Final Word
If you are unable to secure financing from a traditional lender for any reason, it does not mean that all the doors to obtaining credit are closed. There are several options still available to you in the form of alternative loans that will allow you to fulfill your cash requirements.
What you need to do is study and analyze all these options, find out their pros and cons, and then go for the one that suits you best in your current circumstances.