Comparing alternative lending methods

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Home » Business Finance » Comparing alternative lending methods

The traditional business bank loan is becoming more and more difficult for small startups to attain. Even some medium sized enterprises are turned down for loans from their bank as they attempt to diversify and grow their operations.

Because of this difficulty to qualify for business loans, we are seeing more and more companies turning to alternative forms of lending in order to see their business develop.

What is an alternative business loan?

An alternative business loan tends to originate from another source other than one of the UK’s leading lenders. Outside of the big banks, borrowing can be sourced from private lenders that have a more diverse array of options going forward and are more likely to accept a business that is otherwise turned away from the larger, established lenders.

More SMEs are turning to alternative business loans for their higher approval rating, fast growing offers, and benefits such as less paperwork to manage, more flexibility and faster funding.

What are the alternative lending options?

  1. Term loans

A term loan is a simplified version of a traditional bank loan. The funding comes with a set repayment time based on a short, medium or long-term repayment structure. The repayment time will set, as will the number of repayments and business can decide whether they want a fixed or variable interest rate.

Instead of being tied into repayments for too long, term loans are structured to be repaid in less than one year (short term), 1-3 years (medium term) or over three years (long term).

  1. Equipment Loans

Companies are able to source a loan using their company’s equipment (computers, machinery and vehicles) as collateral. Because they are using a company’s equipment as collateral, the lender will care less about the financial situation or credit history and focus solely on the value of the equipment.

  1. Merchant cash advances

Businesses that receive a lot of credit card transactions are able to use a form of lending known as merchant cash advances that pays an advance, paid back by an agreed upon percentage of their daily credit card transactions plus a lender fee.

  1. Invoice financing

This form of alternative lending lets businesses receive the money they are already owed from unpaid invoices quickly, with the lender receiving a percentage when they reclaim the debt owed themselves.

Through invoice financing they don’t have to wait for their clients to pay their outstanding balances, instead they are free to use the funds instantly and be relieved of the pressure of spending time out of their day chasing these late payments.