8 business loan alternatives to consider
Funding is just about the most important thing a business needs to grow.
While some entrepreneurs initially funded their businesses with their own money or loans from friends and family, there finally comes a point in their working lives when they need to rely on financial institutions for continued growth.
Large businesses often have no problem qualifying for bank loans, but the same cannot be said for small businesses. This is why there is something known as a loan or alternative financing. Alternative lenders provide business loans in Canada that are not only flexible, but also quick to fund and accessible.
Here are some of the best alternative business loans available for small businesses or businesses in general:
1. Lines of credit
A line of credit (LOC) is a kind of alternative business loan that people can get from an online lender or bank. However, letters of credit are generally much easier to obtain online than from a financial institution such as a bank.
Letters of credit are generally used as a source of working capital for a business or as a financial net. As a result, users will receive a sum of money that they can withdraw at any time (similar to a credit card). In addition, they will be charged interest on the amount they borrow.
Online COLs are a great alternative for businesses that don’t need specific amounts of money, but just want access to reserve funds so they can manage expenses like payroll during tough times.
2. Alternative small business loan
Mainstream financial institutions are notorious for rejecting applications for small business or micro business loans. Fortunately, alternative lenders come with more lenient regulations and are therefore able to take advantage of the increased demand from small businesses.
According to the Federal Reserve Bank of Richmond’s 2016 investigation, only 58% of small business loan applications were approved by traditional banks, compared to 71% who were approved by alternative lenders in the same year.
Alternative lenders can take advantage of a wide range of data and machine learning, allowing them to tap more into the small business lending market than traditional banks.
3. Term loans
When it comes to business financing, many people typically think of a business term loan. These loans come with a specified number of payments, a repayment term, and a variable or fixed interest rate.
In addition to being issued by alternative lenders, the difference between conventional bank loans and term loans is that they usually come with higher interest rates and shorter terms. Nonetheless, it is relatively easier to qualify for term loans online.
With this in mind, the most common types of term loans and alternative loans are short-term ones – loans with a repayment period of up to a year. On the other hand, other lenders, including Funding Circle, offer longer options.
4. Online loans
Online loans are provided by online lenders, who in turn offer products similar to those of banks, including lines of credit and term loans. However, online loans are different from bank loans in some ways which are in fact crucial.
Online loans usually come with less stringent requirements regarding annual income, time spent in business, and credit rating. They can be funded quickly and are very easy to apply for. However, there is a catch; in return for all this accessibility and convenience, online loans usually come with higher fees and interest rates than bank loans.
5. Peer-to-peer loan
This is another popular alternative business loan option available. It offers the provision of a partner bank, an investor, a borrower, via an online platform. Taking advantage of metrics like social media activity and credit scores, P2P platforms can help link borrowers to lenders at desirable interest rates.
P2P platforms encourage interactions without necessarily holding loans – ensuring costs stay low. It is especially a great option for those who wish to refinance their outstanding debt at the lowest interest rate.
6. Cash advances from the merchant
Merchant Cash Advances (MCA) allow business owners to obtain lump sum financing, in exchange for a fraction of future sales of their credit cards. Those who maintain a consistent series of credit card payments may qualify for this option.
By receiving an MCA, a percentage of your credit card sales will be charged by the provider until the balance has been remitted. And if sales increase, you’ll pay more. On the other hand, you will pay a lot less when sales are slow. It can help your business meet short-term financial obligations without hurting your cash flow.
7. Equipment loans
Equipment financing, also known as equipment loan, is the type of business loan that is primarily used for the purchase of professional equipment. Lenders typically allow borrowers to finance 100% of the value of equipment – the equipment used as collateral on the loan.
Much like invoice financing, users can easily qualify for equipment financing – lenders assess the value of an equipment to determine its eligibility, which is more than conventional requirements.
Like some of the other best alternative business loans we’ve covered our list so far, there are some credit unions and banks that offer equipment financing. However, online lenders can offer more flexible options and faster processes (although the interest rates are high).
8. Installment loans
These loans are offered to borrowers as a lump sum, which is then repaid to lenders at regular intervals until the interest as well as the principal are repaid. Most installment loans from other lenders have a fixed payment amount, which indicates that interest rates do not fluctuate over the life of the loan. Installment loans are commonly used to finance the purchase of vehicles, real estate and business equipment