There are many different types of funding options that small business owners can take advantage of, from working capital loans to real estate financing. In broad strokes, these different types of loans fall into two main categories: conventional financing and alternative financing. In the last few decades, alternative funding options have grown significantly in popularity, especially with SBOs. What are the differences between these categories?
What Is Conventional Financing?
Conventional, or traditional, financing refers to funding options that come from established lenders such as banks. These lenders have to follow strict government guidelines regarding interest rates and other considerations, so traditional loans are often rigid and predictable. To qualify for a conventional loan, businesses generally need a good credit score.
What Is Alternative Financing?
Alternative funding options include every source of financing that isn’t traditional. Some alternative lenders operate online while others support local businesses. These private lending businesses vary in size; some companies have a complete team overseeing loans and other times a solo investor is the one backing financing.
A few examples of alternative funding options include invoice factoring, equipment financing, and asset-based lending. It’s also possible to get business lines of credit or cash advances from alternative lenders.
Why Choose Alternative Lending?
There are several pros and cons to alternative financing. For many businesses, the benefits far outweigh the disadvantages. That said, every small business needs to analyze its needs and financial situation individually.
One advantage of alternative loans, leases, and other financing options is how flexible they are. The reason for this flexibility is simple: Alternative lenders can make their own rules for terms and conditions. Regulations tie down conventional banks, so they often have to stick to specific interest rates and requirements for approval.
On the other hand, alternative lenders are free to approve or deny a loan based on many factors, such as a business owner’s skill and dedication, instead of purely looking at a credit score.
Qualifying for an alternative funding option is much easier than a conventional loan. Small businesses can often qualify using collateral instead of a great credit rating. With purchase order financing, businesses can get inventory based on their clients’ credit scores instead of their own.
Businesses also have more flexibility in the way they use an alternative loans. As working capital, the financing can go toward equipment, remodeling, inventory, payroll, emergencies, and many other needs.