Small scale and MSME owners struggle to get business loans because banks look at various factors before approving loans. Business experience, type of business, business health, collateral, and an excellent credit score are some of the basic criteria that often determine the approval of a business loan. According to Biz2Credit, big banks granted a mere 27.3 percent of all small company loan applications in March 2019, while small banks authorized 49.3 percent, and alternative lenders sanctioned the most, 57.3 percent.
The above percentages show that alternative lenders are approving more business loans than small and big banks. That is the reason many small and medium-sized companies are looking for alternative financing options.
What is Alternative Financing?
If a loan is acquired from outside lenders, instead of banks, then it is called alternative financing. Most of the alternative financing options are available online. There is no need for the borrower to step foot in a bank. Businesses with a poor credit score or have had their loan application rejected by the banks, opt for alternative financing. A business approach exists for alternative financing, as it is easy and faster to get.
Some of the alternatives for a business loan are as follows:
Line of Credit
A line of credit offers you access to funds on-demand, which might help you cover costs such as a home renovation or unexpected auto repairs, etc. A line of credit is a type of credit often issued by banks or credit unions. If you qualify, you can borrow up to a certain amount for a specific period.
You will pay interest on only what you borrowed on a line of credit. In the case of small or MSME businesses, they use this credit for equipment financing. After you pay back the loan, the amount will be again available for borrowing. It is like using a credit card. It is flexible if you stick to the terms. An online business line of credit is an appropriate alternative financing option for a company that does not need a set quantity of money but needs extra cash to meet expenditures like payroll during lean periods.
Term loans, also known as installment loans, can be obtained from banks and credit unions. The term loan should be repaid through regular payments over a time (6 months or 1 year or the term agreed upon). The tenure may vary between 1 to 30 years with fixed or variable interest rates. This looks like traditional bank loans. Isn’t it? But recently terms are being offered online which differentiate regular bank loans from online term loans.
Nowadays, one can apply for business loans online on the websites of lenders. They can also use crowdfunding platforms for availing of loans. Term loans are user-friendly and customizable. Even with bad credit, you can easily qualify for term loans. Term loans can act as a working capital loan for small businesses.
Merchant Cash Advances
A merchant cash advance is a loan secured by future sales. Businesses like retail outlets, restaurants, and medical offices with a steady amount of credit card purchases, are typically eligible for this form of financing. Businesses obtain a lump-sum payment from a lender and then repay it after-sales activities.
Obtaining a merchant cash advance is usually a simple process. After your loan approval, You should get your lump-sum payout within a few business days. During the application process, you may require to provide the following documentation:
- Identification proof (such as a state-issued ID).
- Bank Statements.
- Business Tax returns.
It might be hard to get a traditional business loan if you have less business experience and low revenue. Luckily, many banks offer personal loans that can come to your rescue.
A personal loan is an unsecured loan with flexible end-use. Through a personal loan, one gets an amount of up to Rs. 40 lakh. Businesses can use this amount as a working capital loan. After the loan approval, it takes 3 to 5 days for the disbursal. Personal loan tenure varies between 3 to 5 Years.
Crowdfunding has proved to be an efficient method for certain firms to raise financing from their peers over the Internet. It is suitable for only some kinds of businesses. Debt, incentives, equity, and charity are the four categories of crowdfunding. You do not have to pay the money back with rewards crowdfunding; instead, you promise to give your backers something in exchange for their investment. Someone invests in your business in return for a share of your company or goods using equity-based crowdfunding. It's also possible that you will have to pay a charge to the crowdfunding website. Indiegogo and Kickstarter are famous crowdfunding platforms.
In Invoice factoring, you can finance the business by selling outstanding invoices. The company that is buying your invoices is called a factoring company. After purchasing the invoice, they credit an amount equal to 85-90% of the invoice value. The factoring company collects the payments on your behalf, and after a 1-2% deduction as a factoring fee, credits the remaining amount in your account. There are two types of factor companies:
- Recourse Factoring - If the customer/client fails to pay or the factoring business is unable to collect the payment, you (the seller) must purchase the invoices back.
- Non-Recourse Factoring - In this instance, the factoring business is solely responsible for collecting payments. Non-recourse factoring is available from most firms, though there may be certain restrictions.
Do Invoice Financing and Invoice Factoring sound the same? They are not. Invoice financing companies use your invoices as collateral and offer you the loan. The loan amount depends on the value of the invoices. The financing company does not buy your invoices but is responsible for collecting payments from your customers. Invoice finance is a clever option for firms with outstanding bills that do not require quick cash and do not want to rely on a third-party collection agency. In addition, invoice financing offers cheaper costs than invoice factoring.
Equipment financing is exactly what it says on the tin. That is, you borrow money to buy the equipment required to run your business. Equipment finance includes both loans and leases. Equipment loans are appropriate for businesses that can afford a down payment for long-term useful equipment. If you cannot afford a down payment or if the equipment needs to be changed or improved regularly, leases are a better option.
Microloans are small-scale financing options available to micro-businesses with little or no access to traditional lending institutions. You do not need collateral for microloans. It is granted to businesses in rural areas with low capital requirements. Microloans help in working capital needs, sustaining cash flow, launching a new business, managing day-to-day expenditures, paying wages, debt consolidation, etc. People should opt for microloans or microfinancing if they do not get approval for business loans.