‘Alternative lending’ is one of those buzz words that you’ve likely heard but may not know much about. In this article, we unpack what alternative lending is, how it functions, what is offered within alternative lending, and how to think beyond traditional bank lending.
What is alternative lending?
Alternative lending refers to a variety of loan options that are available to individuals and business owners outside of traditional bank loans. These options are often used when a person cannot get a traditional bank loan.
Well established and growing, the alternative lending industry is staffed by financial professionals who work to serve the community in a flexible and efficient way. These lenders specialize in making use of overlooked sources of collateral, such as real estate, to secure a loan.
Who is an alternative lender?
Non-Bank Financial Institution
Non-bank financial institutions include Credit Unions, Trust Companies, Micro Lenders, and Community Development Financial Institutions.
Peer-Based Alternative Financing
Peer-based alternative lenders and Crowd Funding campaigns allow for business owners, peers, and entrepreneurs to support and invest in one another.
When did alternative lending emerge?
Alternative lending has always existed in some form, but took off following the 2008 U.S. financial crisis. As the banks began to retreat from issuing small business loans, private and online lenders began to take notice of the opportunity at hand.
Stepping in to help businesses that were struggling to get approved, alternative lending began processing loan applications and saved many businesses that were likely to go bankrupt. This is very important to the economy.
What role does technology play in alternative lending?
Technology plays a very necessary and important part in the success of alternative lending. By leveraging data, alternative lenders can serve clients with greater speed, reliability, and ease. Online lenders can process bank statements, tax returns, and more.
What’s the difference between alternative lending and the bank?
Approximately 80% of small businesses do not qualify for a traditional bank loan. While banks are the most profitable and well-known lenders in Canada, there are alternative lenders who can offer better terms and rates. Alternative lenders also work under more ‘relaxed’ guidelines, which can make lending easier and a more personal and compassionate process.
What are the main benefits of alternative lending?
Alternative lending is especially critical for small businesses, which are underfunded and yet require capital to expand. Unlike big banks (that continue to back away from small businesses), alternative lenders can approach small business owners with alternative ways to qualify for loans.
“Alternative small business lending companies provide digital platforms that connect small business borrowers to capital using non-traditional means.” –Business Insider
Here are three major benefits of choosing alternative lending over traditional lending methods:
- Easier To Qualify
Alternative lenders look at much more than your credit history. Rather than just checking boxes off of a form, alternative lenders take a more customized and personal approach. This results in a fair and balanced way of making loan decisions – making it much easier to qualify for a loan.
- More Options
Unlike traditional lenders who have limited options when it comes to financing solutions, alternative lenders offer a variety of options and packages. Whether you are looking for a large, long-term solution, or a very small loan amount to meet a short term emergency, the variety of options ensures that you can get the funding you need faster.
- Faster Approval Process
Banks and credit unions are well known for having long approval processes due to applications needing to be reviewed by multiple individuals. This can drag out the approval process for weeks or months and is not ideal when you are in need of funding right away. Alternative lenders, however, can approve applications anywhere between a few hours to under a week!
What are the different types of loans and services are available from alternative lenders?
Line of Credit
Also known as a revolving credit, a line of credit is an amount of capital that is available for use when needed. If you take out a certain amount of money from your line of credit to pay for an item or service, interest payments only need to be made on what was used. Once the amount is paid off, the funds return to your credit limit. Lines of credit make a great safety net for small businesses.
Lines of credit can be asset-based or unsecured. Asset-based lines of credit are a great option for any business that uses equipment, such as restaurants, beauty salons, or IT companies. Lenders extend lines of credit based on the value of the equipment and assets owned by the business. Unsecured lines of credit can be used by business owners who are perhaps just in the start-up phase or do not have major equipment to use as collateral. Unsecured lines of credit tend to have higher interest rates and payment terms due to the risk that falls on the lender.
Term loans are issued by lenders for a specific amount, with a set repayment schedule. Businesses often use term loans for purchasing equipment, technology, real estate, vehicles, etc., but a term loan can also refinance an existing debt – for a business expansion or for acquiring other companies. Term loan funds may also become working capital, which can help a business cover operational costs such as payroll, rent, and other expenses.
Accounts Receivable financing, also known as ‘factoring’, is a form of alternative lending where a company sells their overdue accounts receivables to a collection company in return for cash. This method will not only get a business the working capital it needs, but it is a great way to streamline accounting, even for businesses who don’t necessarily need the money.
Having your debt in one place can save you both time and money. Consolidating your debts allows you to reduce monthly payments and create increased cash flow by securing a lower interest rate and extending your repayment term.
Merchant Cash Advance
A Merchant Cash Advance (MCA) is an appealing form of lending for businesses who accept credit card payments. Rather than paying back a loan in sizable monthly installments, an MCA allows businesses to pay back their loan in the form of a flat percentage of credit card sales. The higher the volume of sales, the faster the MCA is paid off.
A microloan may be the best solution for those in need of smaller loans. These short-term loans are typically no more than $25,000 and tend to be spread out over five years. With an abundance of micro-lenders willing to lend, finding funding is also much easier.
With the increased popularity of alternative lending, more and more individuals have become involved in peer-to-peer networks. These lending solutions act a lot like social networks and allow individuals to fund other individuals.
Crowdfunding has become a significant source for alternative lending, not only for small business owners and entrepreneurs but also for individuals trying to raise money for personal needs. Crowdfunding can be split into two primary types: Standard crowdfunding and equity crowdfunding. Equity crowdfunding is often subject to more financial regulations since it involves investment into a commercial enterprise.
How can a personal loan benefit me?
A personal loan can be used for a number of things. Most commonly, loans are used to:
- Start a business
- Make a down payment on a home
- Pay for costly vehicle repairs
- Consolidate debt
- Pay for renovations
- Cover unexpected expenses
- Plan ahead for the future
What are the types of mortgages available from alternative lenders?
- Equity Mortgages
Equity is the difference between property value and the mortgage amount owed. Equity mortgages are based more on the equity of a property than the income or credit standing of the property owner and can be perfect for those who are self-employed, have poor credit, or simply want to keep more information private.
- RRSP Mortgages
RRSP Mortgages allows you to be your own bank and to renovate your home (adding further value to it), to invest, or to consolidate debt. Factors to determine your eligibility include what type of property you’re investing in and the loan to value (LTV), which is the property’s value, deducted from the mortgage‘s remaining balance.
- Private Mortgages
Private Mortgages are taken out between an individual and another person, or business, rather than with a bank. Because private lenders do not require the same documentation as a bank, this option may be more appealing to those who do not qualify for loans with a traditional lender.
- Reverse Mortgages
A reverse mortgage is a loan available to seniors and is taken out against the value of a home. These funds are advanced in the form of either fixed monthly income payments or a lump sum.
Get In Touch With An Alternative Lender Today!
At The Mortgage Station, we work with over 40 Canadian lenders and all five sources of mortgage funds across Canada. With access to fixed and variable rate products, we can help you to fee up your cash flow and can provide short cuts to mortgage freedom. Call us today to learn more about alternative lending and how we can help to provide the best mortgage services to you and your family today – 1.877.512.0007.