Sometime along their journey many small business owners come to a crossroads where they must choose to innovate, expand, or navigate a sudden cash flow challenge. Additional capital may help them reach a particular goal or just keep the lights on. Since traditional lending methods are typically more familiar, they tend to be the more popular choice. However, there are several alternative funding options for businesses, such as invoice factoring and asset-based lines of credit, that may offer unique advantages.

Are you in a situation where you require extra funds? Securing the right capital is crucial to your business’s success, growth, and stability—and so is choosing a reliable alternative lender. Don’t know where to start? You’ll want to make sure you are asking yourself and a potential lender the right questions when vetting your options and selecting the best alternative business loan. Have you thought about these?

Q: Why Should I Choose Alternative Funding for Small Business?

A: There are several benefits of alternative business loans for new ventures, young small businesses, and established companies alike, such as:

  • Fast Access to Necessary Capital—Don’t want to spend hours applying for a loan or waiting for a lengthy approval process? Alternative lenders are generally more streamlined, with simplified applications and quick funding, providing faster access to capital than traditional banks.
  • Flexible Funding—Alternative lenders are often more willing to work with businesses that may not fit within the traditional financing profile, have unique circumstances or revenue patterns, or have limited or poor credit. Providers typically look at other factors, such as a business’s potential, revenue projections, and margins.
  • Creative Business Financing—Reliable partners will work with you to understand your industry, needs, and goals to recommend customized solutions that fit your business. 

Q: What are the Different Types of Alternative Funding You Provide?

A: There are a variety of different sources of alternative funding that meet distinct business needs. A trusted partner should explain your options based on your individual circumstances to help inform which solution you choose. Common options you may consider include:

  • Invoice Factoring—Also referred to as accounts receivable (AR) factoring, this option involves selling a portion of your outstanding invoices in exchange for immediate cash. Because invoice factoring leverages your existing assets, it is a non-dilutive solution for businesses that need capital to fulfill payroll, pay vendors, or order more inventory, among other reasons.
  • Asset-Based Lines of Credit—An asset-based line of credit is a flexible business financing option secured by a company’s existing assets, including AR, inventory, and possibly equipment; these assets determine the availability across the line of credit. They’re typically suitable for businesses with short-term capital needs or fluctuating cash flows that need funds to keep operations running smoothly.
  • Term Loans—Like conventional loans, with term loans you borrow a fixed amount of money and repay it over a specific timeframe. Term loans from an alternative lender often have flexibility in loan amounts, repayment terms, and interest rates. Businesses often use term loans for larger investments or long-term projects that will increase topline revenue and profitability. For example, a company may secure a term loan to buy equipment, expand the business, or pursue a project that has a long-term impact.
  • Bridge Loans—Bridge loans operate similarly to term loans but are typically for short-term business loan needs. For example, a business owner may secure a bridge loan while they await a large deposit or tackle a temporary cash shortage.

Q: What Criteria is Used to Determine Alternative Funding?

A: Each provider has its own set of qualification criteria but common factors include:

  • Creditworthiness—While a lender will assess your personal and business credit history, it is not the defining factor for funding approval. If you have limited or less-than-stellar credit, alternative funding may still be a suitable option for you.
  • Revenue and Cash Flow—Before recommending a solution, alternative lenders will work with you to understand your business and its unique circumstances, such as seasonal revenue, irregular cash flow, customer repayment terms, and future projections.
  • Assets—For options such as invoice factoring and asset-based lines of credit, a lender will want to ensure you generate AR or can leverage assets such as equipment or inventory to provide capital.
  • Time in Business—Similar to credit checks, this may play a minor factor in your funding; however, alternative financing generally takes a relationship-based approach and considers a client’s potential when identifying funding solutions.

Q: What Other Factors Should I Consider When Choosing an Alternative Business Loans Lender?

A: When choosing a lending company, there are several factors to consider, such as:

  • Interest Rates and Terms—Ensure you understand the interest rates, repayment terms, and other fees associated with the funding option. A reliable partner should walk you through this process to ensure you know what you’re getting into and that it aligns with your needs.
  • Reputation and Track Record—Ask for referrals, consult your network, and research reviews from previous and current clients.
  • Flexibility—Determine if the lender offers creative financing options that align with your cash flow and operational needs.
  • Industry Experience—Consider if the lender has experience working with businesses similar to yours. 

Other Key Questions to Ask a Potential Alternative Business Loans Lender

Finding a reliable partner in alternative lending is crucial when entrusting your business and finances. Here are questions you can ask to determine if a lender is transparent and trustworthy:

  • Have you worked with businesses similar to mine in the past? If so, they’ll likely understand your unique challenges and be able to offer tailored solutions.
  • What is your upfront advance percentage? This is how much capital you’ll receive upon approval. For example, when factoring invoices, you may receive up to 80% of the value of your outstanding invoice(s). You’ll want to ensure you’re getting sufficient funds to cover your needs.
  • What are all the costs involved? Ask about all the fees associated with your agreement, including the factor rate, interest rate, prepayment penalties, and “days-to-post” fees. This will give you a good idea of transparency, expenses, and if a lender wants to keep you stuck in a long-term contract that nickel and dimes you.
  • How quickly can you provide funds? This is an essential question, especially if you need immediate cash. Many lenders should be able to offer streamlined processes to approve and fund requests within a few days.
  • Will I have direct access to you, my lender? Direct lenders take much of the headache out of traditional lending experiences involving the runaround. It’s also an opportunity to build a relationship with your lender so they can learn more about you, your business, and your unique needs. Make sure your potential partner is accessible to answer questions, educate, and address your concerns. 
  • Will you put my interests first? Ensure you’re working with someone you can trust and who will only suggest solutions that will benefit your business for as long as needed before guiding you toward conventional options.

When it comes to financing options, thorough diligence from trusted sources will always pay off. When considering the factors above and asking the right questions, you’ll be well on your way to selecting the right lending partner and a funding solution that fuels your business’s growth. Learn more about these options and how they can help in our blog.