The Top 7 Bank Lending Alternatives to Consider

When your business earns revenue, you can put back all or some of that revenue into your business to make sure growth and development.

On the other hand, there are instances where your business will need extra financing from a reliable lender. Various business owners opt for banking institutions to secure funding. But banks are not the only solution available to entrepreneurs or business owners.

Below are the top seven bank lending alternatives to consider. We will discuss each alternative to inform you of the appropriate viable funding options.

Lending Alternatives You Must Be Aware Of

Loans from banks are a popular financial product many small business owners use. However, banking institutions have stricter regulations compared to alternative lenders. Because of this, small business owners find it so hard to get vital loans for their business from these banks.

Luckily, conventional bank loans are not just the only financing source that business owners are able to pursue. Below, you will find a short list of great financing options for conventional lending.

Business Lines of Credit or LOC

A LOC is a set amount of funds that a business is able to utilize when it requires cash. You can choose from a secured loan or an unsecured loan.

A secured loan needs collateral like your property (house, car, etc.) while an unsecured does not. Once the money borrowed from the Line of Credit is compensated, it frees up the amount to be utilized in the coming years.

Pros

Can assist businesses in forecasting their potential operational cyclesFlexible financing option which lessens the shortages of cash flow

Cons

High-interest rates
Businesses might depend on the line of credit a lot, which leads to overextending.

Merchant Cash Advances

With this financing option, business owners get lump sum funding in exchange for a percentage of the forthcoming credit card sales. Once you get consistent credit card payments, you are likely a good candidate for this funding option.

Pros

Payments are not fixed; therefore, your weekly reimbursements are based on the company.’

Fast funding option

Reimbursement is directly taken from your account, which eliminates late fees.

Cons

High rates
This is not a good choice if you do not get reliable credit card sales
The rates can be high

Equipment Loans

A lot of businesses need equipment to operate, like a restaurant, construction businesses, etc.; if that equipment malfunctions, it can affect the operation of the business. Sad to say, a lot of companies lack the cash needed to maintain and purchase new equipment.

As the equipment serves as collateral, business owners can often acquire funding for a big percentage of the cost of the equipment since it is a secured loan.

Pros

Easy to obtain as it is considered a secured loan
It has low rates, but it is vital to pay attention to the terms and conditions before applying.

Cons

Many lenders need a down payment for an equipment loan
Once equipment becomes outdated, it might be hard to get any concrete value from it.

Professional Practice Loan

This loan falls in the specialty loans category for legal, medical, and even accounting experts. Some of these loans are for doctors, as their funding requirements are often higher because of the high value of medical tools and equipment.

You can use this loan to purchase initial medical tools and equipment or get other professional practices. It might also include malpractice insurance costs.

Pros

Have attractive rates, as professional service business has a low default rate
Lenders concentrating on professional practice loans are likely to know the risk related to them.

Cons

Medical practitioners might spend a lot of the loan amount on non-core functions, which causes the company to suffer when it requires capital infusions.

Franchise Startup

A franchise is a form of business that assists people who like to put up a business but do not want to begin from scratch. This assists by allowing you to piggyback on the achievement of a renowned brand.
This is often needed to raise resources to cover the expense of the cost of the franchise. But, the franchisor might fund options available to assist the franchisee with this need. On the other hand, a possible franchisee might require putting up some resources in the process.

Pros

A franchise is a renowned brand that assists in the financing decision.
Usually, franchises are based on proven methods that put the chances of success higher compared to putting up a company from scratch.

Cons

Initial resources can be out of reach for a lot of borrowers

Invoice Factoring

This is considered one of the oldest types of financing for business; however, a lot of company owners are not aware of this alternative, in spite of its long background.
A factoring business will agree to purchase the receivables made by invoices.

Factoring is not regarded as a loan; it is a transfer of assets. The factor gives out a discounted amount of cash based on the price of receivables and, most of the time, takes a role in the collection for the company.

There is a difference between asset-based lending and factoring, where a loan is made. In asset-based lending, receivables are utilized as security for a mortgage, which affects the credit history of the company. Factoring, on the other hand, because no loan is made, the credit history remains intact.

Pros

Company owners can get invoice factoring cash in just a matter of weeks or days.
Factors employ the role of the creditor for the business.

Cons

Expensive business funding alternative

Working Capital Loan

This refers to the loan utilized to fund the company’s core operations. Daily operations can cause funding difficulty when a business does not have the money to sustain itself. This often happens with seasonal firms or companies subject to recurring sales. Still, companies in different industries can experience working capital shortages now and then.

This is not a particular loan type but more of a classification of loans. Any loan that assists a company meets operation obligations in the short term could be regarded as a working capital loan, including term loans, LOC, and invoice financing.

Pros

Company owners can keep equity in their companies
Typically, collateral is not needed; however, terms are subject to lenders’ requirements.

Cons

When collateral is needed, it could put collateral properties at risk.
It can affect the business’s credit rating if you fail to pay the balance in a given time frame. So, assess your cash flow before applying for this kind of loan.

Conclusion

Factoring is not regarded as a loan; it is a transfer of assets. The factor gives out a discounted amount of cash based on the price of receivables and, most of the time, takes a role in the collection for the company.

There is a difference between asset-based lending and factoring, where a loan is made. In asset-based lending, receivables are utilized as security for a mortgage, which affects the credit history of the company. Factoring, on the other hand, because no loan is made, the credit history remains intact.

Pros

Company owners can get invoice factoring cash in just a matter of weeks or days.
Factors employ the role of the creditor for the business.

Cons

Expensive business funding alternative