A change in the wind: The ins and outs of alternative lenders
September 30, 2021
When most people think about business funding, banks come to mind. And there’s a reason for that: banks remain a major source of funding for businesses across the globe. But for many founders, particularly those who are just starting out or who have poor credit scores, securing funding from a bank can be nearly impossible.
According to Business Insider Intelligence’s SMB Lending Report, small businesses make up nearly all of the United States’ private sector businesses, employing roughly 60% of all workers in the country. But banks are not quick to offer loans and other sources of funding to these startup founders, and without a track record, it’s hard to prove that your business won’t fail. That’s where the alternative lenders come in.
What are alternative lenders?
According to reports by the SME Finance Forum, there was a funding gap of $5T between the funding needs of small businesses in America and the institution-based financing available to them. As a result, many small business founders have had to seek alternative funding options.
Alternative lending refers to funding outside of the traditional bank lending ecosystem. Alternative lenders offer a range of financial products, including loans, cash advances, and even donations. They tend to be more accessible for small business owners, with less red tape and quicker access to funds. Some are more applicable to e-commerce, while others cater specifically to business types like SaaS.
Types of alternative lending
The alternative lending space encompasses a broad range of non-traditional funding. These include, but are not limited to:
- Revenue-based financing, like merchant cash advances
- Government funding, like grants
- Invoice financing
- Crowdfunding, including peer-to-peer lending
- Microfinancing and microloans
- Business credit cards
- Donations from friends and family
What to look for in alternative lenders
If you’re a founder, it may be tempting to jump to an alternative lending provider as the long-awaited answer to your cash flow woes. But just like with traditional funding, you need to consider the needs of your business and how alternative lending fits into them.
There are a number of key factors you should consider, including:
Many founders turn to the alternative lenders because it circumvents the complicated and overdrawn process of securing a bank loan. On the other hand, alternative lending options like merchant cash advances involve a simple and quick application process.
It can often take many months to receive bank funds; many small businesses don’t have the luxury of waiting that long. While some alternative lending models take place over a specified amount of time (like crowdfunding), approval and disbursement from most providers occur faster with alternative lenders compared to banks (sometimes in as little as 24 hours).
Securing funding is a challenge in and of itself, but you don’t want to end up locked into a contract with little flexibility for repayment. When selecting an alternative lending provider, opt for ones that allow you to continue to operate your business without too many restrictions.
When looking at alternative lending options, you want to weigh the likelihood of receiving the loan vs. the likelihood that your application is denied. Depending on your business type and operations, different methods of funding will be more appropriate than others.
It’s important to take into account the reputation of a given lender when considering your options. Be wary of lenders that are not transparent about their fees and interest rates. At the end of the day, your funding should allow you to grow your business at scale; if you’re drowning in unexpected fees, it may be time to reconsider your alternative lending provider.
Alternative lending with Clearco
If you’re a founder seeking alternative funding for your e-commerce business, you’re not alone. Many founders before you have benefitted from Clearco’s no-strings-attached funding. Here’s why:
- Receive a funding offer in 24 hours: Connect your accounts and you’ll find out if you qualify for funding within the next day.
- Flexible payments, on your terms: You pick the capital amount and term length that works for you.
- Get all the details upfront: Our unique revenue share model means you only pay us when you make revenue, plus a flat fee per month.
- Retain 100% ownership: With Clearco, you’ll never have to give up equity in exchange for funding. Plus, we offer equity-free capital top-ups when you need them!
Thinking about taking equity-free funding for your business?
See how much you qualify for with no commitment.GET FUNDED TODAY