Today, banks no longer command the lending market. Businesses of all sizes and industries have a variety of choices when it comes to funding, with most of them being better than traditional loans.
Modern businesses are increasingly turning to bank loan alternatives as most of them simply do not qualify due to the rigorous eligibility criteria laid out by these institutions. As a result, for many modern businesses, alternative lending has become the primary option over previously being the last resort, to efficiently meet their funding gap.
However, you must be wondering what are these bank loan alternatives we are referring to? Thus, here’s a list of the 5 most popular alternative financing solutions for today’s small and medium businesses.
1. Microfinancing
Microfinancing is one of the most popular bank loan alternatives and, as the name suggests, is a small ticket loan offered to SMEs. Generally, microfinance loans are underwritten either by specialized institutions such as microfinance companies, small banks, cooperatives, and other non-banking financial institutions or via separate arms of larger financial institutions. Although the name might indicate that the value of these loans are small, in reality, they are very significant when compared with the scale of the borrowing business. For instance, a USD 50,000 microloan might mean the difference between an SME keeping their doors open and shutting them down.
2. Asset-Based Loans
Next up in line are asset-based loans. Sometimes referred to as bridge loans, these are short-term financing options wherein a lender will infuse fresh capital into your business against an asset. In contrast to a traditional loan, wherein you need to participate in a credit check, you generally need to pledge a collateral or asset of equal or greater net value, such as your equipment, property, machinery, or invoices, to secure the loan. One of the most significant advantages of a bridge loan is the fact that these are generally very short-term, meaning you can repay them back quickly without taking on too much financial strain.
3. Line of Credit
A line of credit is a flexible financing option which is offered by both traditional and alternative lenders. As the name suggests, in a line of credit, the borrower is offered an upper cap on the total amount of funds they can borrow and are given the option to flexibly withdraw a certain amount based on their requirement.
For instance, if a business is offered a USD 100,000 line of credit, they are free to choose any amount ranging from USD 1 to USD 100,000 based on their requirement and flexibly pay it back over a period of time. One of the most interesting aspects of a credit line is the fact that the business owner only needs to pay for the amount they withdraw and not the entire line. Most modern business owners start their entrepreneurship journey with a line of credit either from a bank or an alternative lender, as it offers a great deal of flexibility without much financial strain.
4. Merchant Cash Advance
The idea behind a merchant cash advance is simple – the lender gives the business lumpsum capital against its forecast of future revenue.
Mostly applicable to establishments with recurring revenue, in this model, the lender underwrites the loan by first assessing the past revenue of the business such that the lender can acquire a fair idea about the business’s revenue-generating capabilities. A merchant cash advance or an MCA loan is also a very short-term financing option, as the borrower needs to make the repayments by sharing a percentage of the business’s daily recurring revenue. MCA loans are generally very affordable, and since they are offered by both traditional and alternative lenders, you can easily secure approval for them.
5. Recurring Revenue Financing and PayLater Direct
Last but not least are recurring revenue financing and PayLater direct, both of which are alternative financing options which give you immediate access to capital without you needing to share equity or pledge any personal collateral or asset.
As the name indicates, a recurring revenue loan is one wherein the financier assesses your last 6 months’ bank statement to recognize your most significant revenue sources and forecast your future revenue based on the same.
Similarly, PayLater Direct is a term loan wherein you can secure up to SGD$ 250,000 in capital without needing to pledge your equity or collateral. The advantage of both these financing options is the fact that the repayment terms are very flexible, tenures are short, and interest rates are affordable for small and medium-sized businesses.
Why Are Bank Loan Alternatives Gaining Popularity in the Founder Community?
As we showcased above, today, there are multiple options available to any founder in terms of alternative financing. A great benefit all of them arrive with are great flexibility both in terms of the application process and repayment structure.
For instance, whereas most traditional loans take anywhere from a few business days to a few weeks to process and disburse, alternative lenders have accelerated the timeline to 1 to 3 days. Along the same line, alternative loans arrive with a flexible repayment structure meaning the business owner can repay the loan without taking on additional financial stress.
Beyond the above pointers, alternative lending is simpler as it often doesn’t require a credit check, and the founder doesn’t need to pledge his personal collateral or asset and gets to preserve their ownership.
Lastly, entrepreneurs often turn to alternative lenders as they are more likely to offer small-ticket loans to SMEs, and as shared earlier, this can mean the difference for an early-stage business. All these factors combined make alternative loans the first choice for many entrepreneurs.
Takeaway – The Best Option for Your Business
Now that you are aware of the various alternative financing options available to you, you need to take a call to choose the best one for your needs. During your analysis, take into account both the loan amount being offered, along with the tenure, and the repayment terms, as each of these can impact your lending experience.
If you are looking for alternative financing in Asia, CrediLinq should be your go-to partner. At CrediLinq, we are pioneering alternative financing for businesses in developing economies by curating a catalogue of financing solutions specifically designed for SMEs. To learn more about our offerings, get in touch with us today.
