Best Bank Lending Alternatives to Consider in 2023

Alternative to business loans or alternative lending is provided by sources other than traditional financial institutions. It is used by small businesses that need funds quickly and may want to avoid going through the traditional loan application process. As per a survey report by a management firm, the alternative business loan sector will grow at a CAGR of 23.6% between 2022–2030. 

Alternatives to Business Loans

Alternative business loan lenders typically operate online and utilise technology to underwrite, price, and issue various forms of company loans. They typically use digital data sources to examine finances and decide your creditworthiness, whereas traditional lenders rely on a manual review procedure.

Continue reading to know more about some of the best alternatives to business loans you can consider in 2023.

Line of Credit (LOC)

An LOC allows a business or individual to borrow a set amount of money until the pre-decided limit is reached. You are liable to repay the amount you withdraw plus interest. After each payment, the credit line is replenished until the conclusion of the withdrawal term.

Pros

• Reduces cash flow issues with flexible funding options
• Allows firms to anticipate future operational cycles

Cons

• In some instances, interest rates might be high.
• Businesses may overextend themselves if they rely too heavily on their LOC.

Equipment Financing

One can acquire equipment financing from both traditional and alternative lenders. As the name suggests, you use a car or equipment as collateral against the loan. However, you might lose the equipment if you fail to repay the loan. So, before committing to a loan for equipment, study the terms and circumstances.

Pros

• Secured equipment loans are, therefore, easier to obtain.
• Have modest interest rates. 

Cons

• Need help to obtain tangible value from old equipment.
• Might end up losing the equipment if you fail to repay the loan.
• Lenders demand a significant down payment.

R&D Advance Funding

R&D Advance Funding is a type of alternative business loan in which financial support is provided to businesses to help fund their research and development (R&D) projects. It involves investigating new ideas, products, processes, or technologies and is often high-risk and time-consuming. 

However, advance funding can help companies cover project costs, such as salaries for research staff, equipment, and materials. 

Pros

• It is a less expensive alternative that enables you to calculate the exact amount of debt to repay while retaining control.
• The loan timeline often spans many months and is reduced to one or two weeks.

Cons

• Tax credits for R&D are subtracted from any current tax obligations. Therefore, R&D finance will not be a suitable source of capital for a business with a high average tax liability.
• It is a debt instrument secured by the company's assets. This can be a problem if current or prospective investors want the company to avoid issuing (more) securities.

Invoice Factoring

A company can sell its unpaid invoices to a factoring firm for cash up front, often up to 60% to 97% of the total invoice amount. In turn, the corporation receives money from the consumer, deducts a modest fee, and then transfers the remaining earnings to the business owner. This type of alternative business loan is frequently mistaken for invoice financing, which includes borrowing against the invoices.

Pros

• Invoice factoring money is typically provided to business owners within a week or less.
• The component examines the risk to the business owner's consumers, allowing business owners with a poor credit history to secure funding.

Cons

• There will be factors engaged in the firm's daily operations.
• The company may see reduced profits on discounted invoices in the short term. 

Crowdfunding

Crowdfunding is a method of funding a business project or new venture. It involves pooling small investments from multiple investors rather than a single investor. In exchange, one can promise to offer products or equity in the company. Usually, it is done via a crowdfunding platform that acts as a mediator between the investors and the business.

Crowdfunding has various advantages, but it's vital to realise that each crowdfunding site is unique. Some sites only provide funding for a brief period, others require you to reach a certain objective to obtain cash, and others act as permanent community hubs. Read the fine print to fully comprehend that you may receive nothing if you choose this path.

Pros

• It can be a rapid and cost-free option to raise capital.
• Online pitching of a project or business may be an effective form of marketing and garner media attention.

Cons

• If you do not accomplish your funding goal, promised funds are typically returned to your investors, and you will receive nothing.
• It will not necessarily be simpler than the more conventional methods of gathering funds, as not all projects that seek crowdfunding platforms are accepted.

Conclusion

Alternative business loans are a financing option for small firms that may not qualify for regular bank loans due to poor credit or startup status. These loans can be useful for borrowers who need funds quickly and are willing to pay a premium. 

However, traditional lenders like banks and credit unions may offer more cost-effective and favourable loan terms for larger amounts and longer repayment periods.