Alternative Lending Increasingly Popular; but is it Right for Your Business?
The world of business has changed dramatically in recent years. Innovations like AI, smart phones and social media, have altered the landscape for businesses large and small and opened up new possibilities for funding their operations. At the same time, these innovations and changes have allowed ordinary investors to participate directly in business funding. Thanks to these changes, business lending is no longer the sole province of bankers—alternative lending allows everyday individuals to participate. These alternative lending options take many forms. The crowdfunding option is a popular outlet for entrepreneurs, one that gives early investors first crack at new products and the chance to get in on the ground floor of a new enterprise.
Crowdfunding can be a Win-Win
When done well, the crowdfunding form of alternative lending can be a win-win. Entrepreneurs, small business owners and investors get to fund their operations and live out their dreams, while interested individuals get access to new technology and cutting-edge products and services.
Direct Investing Allows Access to Individuals
Crowdfunding is one type of alternative lending, but it is not the only way for business owners to raise funds and investors to get a solid return. Direct investing has become increasingly popular in recent years, driven by low interest rates and abundant capital. Instead of settling for nearly nonexistent returns on saving accounts and certificates of deposit, investors with cash to spare can lend it directly to entrepreneurs and business owners. Those entrepreneurs and business owners, who may not have the collateral or track record to qualify for traditional bank loans, are able to get the cash they need.
Proceed with Caution
Of course, these forms of alternative lending have their risks, and it is important for investors to proceed with caution. Unlike those previously mentioned savings accounts and certificates of deposit, direct business loans do not come with any guarantee. Investors could find themselves on the ground floor of the next Apple – or out in the cold with the next Pets.com. Those on the other side of the alternative lending platform face challenges as well. Direct lending operations must attract would-be investors, and they do so with higher rates of return. Those high rates are funded by higher than average interest rates. These are rates business owners must pay to access the capital they need.
Don’t Want to Lose Control? Consider Other Options
For those business owners, who want to keep ownership of the company but are not able to get traditional financing from a bank may want to seek alternative means of financing. There are a number of financial institutions but are able to finance a business. Their requirements are often less strict than a bank and they tend to approve more business funding requests than banks do. They often go through the approval process much faster than banks do, which means business owners could get access to money more quickly. One example of alternative financing is invoice factoring. Consider that more than 60 percent of businesses are affected by late payments by their customers for 30,60 and even 90 days. Invoice factoring, or accounts receivable financing, offers many benefits to businesses including a fast cash advance period, a streamlined collection process and the ability to increase funds without taking on debt.
The Bottom Line
Whether you are an investor in search of higher rates or a business owner looking for working capital, alternative lending can be a valuable tool. But as with all tools, it is important to educate yourself. From direct funding to crowdfunding, alternative lending is an interesting phenomenon, one that has been growing in popularity from Silicon Valley to the American heartland.
About Universal Funding
Universal Funding is a privately-owned funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have cash in your hands in a matter of days.