In today’s time it is not very easy to secure funding for small businesses where either the ITR is of low amount , no credit history, low credit score or say it is -1 or 0 , no more collateral to offer to a bank/financial institution or leveraging basis the balance sheet size is already over.
Banks and traditional lending institutions have tightened their leash on lending as a precautionary measure to avoid the mistakes committed during recession. This has caused a credit deficit in the market but some new financial entities have entered the scene to fill the gap.
These entities offer excellent alternative financing options to businesses looking for quick and easy loan. And startups and small businesses often require quick loans because they do not have cash in reserve to rely on. Their credit needs are sudden as a business opportunity or crisis may knock at their door any time, new expansion, internal working capital requirement for working capital gap for a short term. So, this trend of “alternative lending” is like the much needed elixir that small businesses can utilize to fuel their growth and expansion strategies.
Types of Alternative Lending Options
I am just trying to give a snapshot of alternative lending options which comes in various forms and you can utilize any of them to fulfill your credit requirements.
1. Peer to Peer Lending
Simple, hassle-free and quick to the core, peer to peer lending is also known as online lending where lenders offer credit to borrowers through a facilitator i.e. a website. The owners of these websites create a marketplace for both the parties and let them choose. The procedure is very amicable and one can get loans at attractive rates. The repayment terms are flexible and no need for collateral or guarantor.
2. Crowd funding
Innovative, dynamic and popular; crowd funding allows you to use the social media platforms to generate funds for your business or project. Relatively new, it has caught the fancy of investors as well as common people who have an eye for business. With it, you can raise money from different lenders at zero interest rate. In return, you offer them equity or a specific share in profits.
3. EDC Swipe Loans
Easy and quick, EDC swipe loans are quick loans that are secured by swiping your credit card with cash swipe machine. It gives you access to a quick and all-purpose loan with easy EMI and attractive rates. Fast and simple, it does not require any collateral or paperwork either.
4. Customer Lending
Customer lending refers to credit lent by the customers of the business entity. In exchange, the business/borrower promises to pay back their lender/customer in kind i.e. with products at discounted prices. It is very popular in the agriculture and food industry. It offers easy and fast loan with no collateral.
An old alternative finance method, factoring refers to the loan secured by a business against its account receivables (money owed by customers in exchange for goods/services that have been used but not paid for). It offers quick access to cash and is suited for a growing business with regular sales.
6. Convertible Debt Instruments
This refers to the loans secured against the assets of the company. It may require the company to part with some of its equity if the lender desires so. It offers fast access to money and is also cost-effective to a great extent. The lender is also at less risk and gets more choices in terms of repayment.
The lending business
Lending, one of the primary functions of the business, is also changing. Various players like Neogrowth are now using technology to make loan payments hassle free. For example, in Neogrowth’s business model, the repayment is automatic and flexible so that the merchant doesn’t need to pay a fixed EMI. It is based on the merchant’s average card sales.
These alternative finance options are undoubtedly helpful but they too come with certain pointers like high interest rates but they are damn fast and available with not so deep dive on traditional paper work. In general, they are expensive than bank loans. So, in order to make their best usage, first pinpoint what needs to be funded in your business. Examine your situation meticulously. Also, thoroughly evaluate the timing. Compare the different lending rates and then select the one which will fulfill your requirement and pose no threat to your equity.
At the end these options comes with high degree of flexibility which sometimes overpowers their high rate of interest and of course they make sense if the loan required is for a shorter duration.
Jatinder Mohan Singh Shah
Sr.Vice President – Sales & Marketing
NeoGrowth Credit – Business Loans specially created for Retailers & Online Sellers
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