By now a large number of small business owners have been exposed to alternative business loans. Small businesses, which we categorize as 1-50 employees with revenues of $100,000 to $2M per year, get declined for a traditional bank loan over 80% of the time. The usual reasons are due to a low credit score (under 630 FICO), a short time in business (less than 3 years), or a capital need (under $100,000) that isn’t worth the bank’s time.
What Is An Alternative Business Loan?
An alternative business loan is known as a merchant cash advance, business advance, or working capital advance (there are other types like factor loans but we will limit to this). These type of business “advances” have much lower approval thresholds and require much less documentation.
Lending decisions are given in less than 24hrs and you can receive your capital in just a few days. Repayments are made daily each weekday directly from your bank account and the terms are relatively short (3-18 months). The cost on these are much much higher as well. Expect to pay rates between 15% and 60% in some cases depending on credit, industry type, and time in business.
Alternative Business Loan Tips
What You Should Look Out For
In most instances, once you have been funded you will be bombarded with calls from alternative business loan brokers looking to provide you with more capital. DO NOT FALL FOR THIS. Your funding amount is more than likely all you can handle to repay in the time frame of your advance.
Your current lender has volumes of data that tell them how much to lend and for how long. Taking more money from another lender will kill your cash flow and possibly ruin your business. While it is enticing, you must have the will power not to take on any additional funding.
If you do, you may find yourself right back at square one. There can be instances where it makes sense, but if you’re increasing your daily payment amounts too much to pay off your advance it will be detrimental to your business.
Additional Alternative Business Funding to Pay Off Current Loan
This is also another enticing offer to stay away from. A new lender or a broker will call you to offer additional funding at a lower rate to pay off the first loan. What you would be doing is paying off interest with interest. Your best bet is to go back to your original alternative business lender and request more money as a refinance. Usually, your outstanding interest will be forgiven with the new financing.
Alternative business lenders do play a significant role in our nation’s economy. They are providing capital to small businesses throughout the country allowing them to grow and prosper. Every industry has their users and abusers. Do your due diligence prior to working with a lender or broker in this sector to weed out the “good” ones.