Non-bank alternative lending: what you need to know
November 03, 2021
The earliest banks can be traced back to Roman temples. Home to devout and honest monks, temples were thought to have an added level of security (1).
Today, modern banks have much higher security measures in place—a far cry from holy sanction. When it comes to securing business loans, most founders would agree that banks are anything but holy.
In most cases, new business owners can't always access the funding that they need to be able to scale and invest in activities to grow their businesses. Creating superb branding, investing in cutting-edge campaigns, and paying top-notch suppliers aren’t cheap initiatives.
Most banks require business owners to take on more debt than they can afford. Repayment agreements are often too expensive for a new business, and banks tend to tack on many hidden fees. Commonly overlooked fees include overdraft, interest, application, prepayment, late payment, administration, and insurance costs.
Bank loans can come with some pretty stringent application requirements, too. Sometimes founders are required to make a personal guarantee so that you are financially responsible for any debt. In other cases, you might be required to offer assets as collateral, or pay upfront for a credit history check.
Run into some of these funding issues before? There is a better way, my friend.
What is non-bank lending?
Non-bank lending is a form of alternative lending. Over the past decade, it's largely shifted online. Online loans tend to be more flexible and can come unsecured, meaning you don’t have to put down assets or sign a personal guarantee. Depending on your lender, you may be required to give up equity in your business or sign a legally binding document.
The pros and cons of online lending platforms
Non-bank, alternative financing options
Also known as a demand loan, this type of funding allows a lender to access a lump sum of money that will be repaid within an agreed-upon timeframe. This timeframe ranges from one year after taking funding to up to three years after. Short-term funding is a great option if you aren't eligible for bank funding or don't have enough credit for a business loan from your banking institution. These loans allow you to fill immediate working capital gaps in case of emergencies or advertising needs for a large promotion, for example.
Intermediate-term loans are loan agreements that range from one to three years. Repayment is typically fixed and you can get funding of up to $1M. Interest rates will hinge on whether your intermediate-term loan is secured or unsecured. Fees will also depend upon your business finances and the loan amount you have taken. Interest will be slightly lower than a short-term loan because the lender gives you a longer time frame to repay the debt. Intermediate-term loans can be great for expanding your business, growing your team, buying and repairing equipment, and other operational costs.
Long-term loans are fixed amounts that you access and pay back with interest and other fees tacked on top. Interest rates tend to be low, as your original amount is much higher than on short and intermediate-term loans. For repayment, borrowers will have a minimum of one year to repay the debt, usually via monthly installments. This type of loan typically requires collateral, paperwork, and good credit history.
In this type of financing, lenders use a company's assets as collateral. These assets typically involve property, inventory, or accounts receivable, and can be seized if repayment is neglected. This means of funding helps you cover long- or short-term costs like ordering raw materials to scale up production, for example.
Business lines of credit
A business line of credit is a form of borrowing in which a borrower takes what they need from a credit line from a lender until the borrower hits an agreed-upon limit. With lines of credit, interest rates tend to be high, and there are penalties for making late payments, so be sure not to spend more than you can repay. Business lines of credit can be both secured or unsecured; however interest rates on unsecured lines of credit will be higher. Lines of credit are a revolving means of funding and spending. Once you spend to your credit limit, you can repay the funding and continue to spend again. Lines of credit agreements usually last one to two years.
Merchant cash advances (MCA)
Revenue-based financing (RBF) is a funding model that projects your business revenue. You are given funds based on your business data like your sales income. After an assessment, a lender proposes a payment percentage from your daily sales until your originating funds are paid back in full. Once your funds are paid back, you can take another round of funding if you so choose.
Why you need alternative financing
Non-bank lending is a great option for founders of budding businesses looking to quickly and easily apply for funding online. Instead of going through a long, drawn-out application process and risk going into debt, you can access Clearco’s revenue-based financing. These low-risk, non-bank financing options spur growth activities for your business. Want to apply for non-bank lending? Simply connect at least one sales account to see how much funding you can get.
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