The same economic conditions plagued 2022 greeted us as we entered 2023. Inflation, supply chain problems, and uncertainty continue to hinder our ability to do business in our industries. There is no light at the end.

Banks and credit unions have increased lending standards across the board in response to the Federal Reserve’s hikes in prime rates. They are now more selective about the businesses they finance. Entrepreneurs who would have been approved quickly a year ago now face denials, which leaves them with few options for growing and developing their businesses.

Bank loans are not your only option. Alternative business lending can help you get the money you need to achieve your goals and remain competitive.

Continue reading to find our complete guide to other business lending options by 2023.

What is Alternative Lending?

Alternative lending is also known as alternative financing. It refers to capital sources that are not available through traditional banks or credit unions. This space offers the same solutions that conventional lenders but with more options, such as revenue-based financing and other specialized options.

banks span-style=”font weight: 400 ;”>, alternative lending institutions offer faster underwriting and funding times, as well as lower eligibility requirements. All these benefits have one drawback: higher interest rates.

Lenders will not accept less restrictive qualifications. As a result, they will impose higher interest rates to protect themselves from defaults or late payments. The average alternative lending rate ranges from 4% to 30%, for example.

Why would someone not work with their bank?

The bank is a staple in the world of business financing. They were the only option for entrepreneurs looking to get capital before the internet. It’s easier now to find other funding sources than banks. However, that doesn’t necessarily mean you should not go through your bank for financing.

It’s fine to grow your business with bank financing. However, it’s a little more difficult for those who have low credit scores, limited time in business or low gross revenues.

The requirements for bank approval are very strict. To be approved by Bank of America, you will need to have a credit score of 660+, $250,000+ in annual income, and approximately two years of experience in business.

Many growing businesses don’t meet the strict eligibility requirements. They re-invest their profits to improve other areas of their business. One common example is when a company signs a contract and uses the money immediately to launch a new marketing campaign. To approve financing for a business, banks need cash reserves and liquidity. This often limits the amount and terms of funding available to fast-growing businesses.

Bank financing can also be difficult for people who work in niche market, high-risk industries, or new industriesspan styling=”font-weight 400 ;”>. Traditional lenders tend to stick to what they know and don’t want to take on risks when financing businesses that they don’t understand. This group includes industries like cannabis, food service, newer technology, and other sectors that make it difficult for entrepreneurs to get approvals that are right for their business model.

However, it is now more difficult to work with a bank in 2023. Due to the current economic environment, traditional lenders aren’t able to finance as much as they once did. Even entrepreneurs who meet the strict criteria face denials. It’s not impossible to do so, but it is difficult for many businesses to do so in today’s economy.

Bank Lending vs. Alternative Lending in 2023

To combat inflationary pressures, the Federal Reserve raised the prime rate seven more times in 2023. It landed at 7.5% at the time this article was published. As mentioned above, banks are slowing down lending until economic conditions improve. Entrepreneurs with growing businesses face a challenge because of the higher cost of capital as well as more restrictive lending. It’s hard to capitalize on opportunities and solve problems without capital, especially if cash flow is tight.

While alternative lending has always taken over the bank lending gap, in 2023 it will be a more important resource. One, the higher prime rate is more comparable to alternative lending interest rates than ever, making capital costs almost identical between alternative business lenders and banks.

Alternative financing can be a great option for entrepreneurs. However, they don’t have to feel guilty about not getting a lower rate from the bank. You always have the option to refinance your debt later if interest rates drop.

The Most Popular Alternative Business Lending Options

To grow their business, entrepreneurs can take advantage of a number of other options for business financing. Here are some of the most sought-after:

Term Loans

Term loans are the most common type of loan people think about when they hear “business loans”. They are a lump sum payment you pay over a set period. Each payment will be applied towards the principal and interest. You’ll be free from any debt once you have paid the entire amount.

Business Lines of Credit

All industries are familiar with lines of credit. You can open a business credit account with a lender to borrow funds as needed. Interest is only charged on the amount borrowed, not the entire credit line. A line of credit can be established with a bank, or another lender. However, banks are known to suddenly pull out lines of credit in times of trouble.

Equipment Financing

Equipment financing allows you to divide a large equipment purchase into smaller payments. While alternative lenders may have higher equipment financing interest rates than banks, banks are more selective about what equipment they finance. This is a negotiation, so be sure to consider all options before signing on the dotted sheet.

Revenue-Based Financing

This is the method to access capital. It’s based on your company’s profitability . Lenders will review your financial statements and forecasts and then decide your terms and funding amount. While banks are less likely than other lenders to offer this service, there are some things you need to be aware of when you are considering revenue-based financing options.

Merchant cash advances, as you might have guessed are a form of revenue-based financing. You need to be careful about the red flags and scams that can pop up in this area. You could end up with a predatory agreement or one that doesn’t work for your business model. This could have serious consequences for your bottom line. To get the best results, To ensure that you are able to trust the organization, be transparent with them, and protect your interests, it is important to thoroughly research the company.

Alternative Lenders

There are many specialties that alternative lenders can offer. While some are more suitable for startups, others are better suited for established businesses with strong credit scores and long-term business history. There are also micro lenders who offer smaller amounts, regional lenders who work in certain areas, as well as specialty lenders that finance specific industries.

FinTech marketplaces also offer alternative lenders. These are relatively new approaches to financing business that are designed to save time and money. These platforms combine multiple lenders into one platform where business owners can apply once and get multiple offers. National is one such marketplace that streamlines the process by combining technology and human advisors. However, every marketplace works in its own way to assist its clients.

Angel investors are the last type of alternative lender you need to be aware of. These investors are either individuals or groups that provide funds for entrepreneurs in return for a portion of their business. The funding amounts are determined by the value of the business. A capital investor might offer $300,000. In return for 30% ownership in your $1,000,000 business, for example.

How to Apply with Alternative Lenders

Many people search the internet for alternative lenders. Some people find them by word of mouth. However, you won’t have the same experience as when you visit the bank in person.

You can search for alternative lenders even if you don’t use a marketplace. All you have to do is type “alternative loans” into the search bar. It’s the difficult part of choosing the right lender for you. Each option will require you to thoroughly research it, making sure you are aware of the eligibility requirements and programs they offer. You should also conduct a reputation check of each one. You can also visit Trustpilot review site to learn more about the service and hear from other entrepreneurs.

Once you have selected a few options, you can begin filling out applications for each lender. Each organization has its own application process. However, most alternative lenders offer a simplified application process that takes much less time than a bank loan application. This reduces the frustration. The next steps are more difficult.

Each application that you submit will be reviewed by the applicant. After you have received approvals or denials, you can narrow your search to find the terms and amount that are most suitable for your business. You can’t forecast the future so it’s important to consult a trusted financial advisor to ensure that you make the right decisions for your company.

Which is the Best Option?

The simple answer to this question is “It depends.” Each business is unique and each will have its own characteristics which make it more appealing than the other. Although there is no universal answer for all businesses, here are some factors that can help entrepreneurs make the right decision.

Funding Times

It is important to take into account the speed at which a lender can approve funding applications. Credit unions and banks have an average funding time of 60 to 90 days. Alternative lenders offer quick approvals and funding times. Alternative business lending is a good option for people who urgently need cash. However, if you don’t require immediate cash, it may be better to work with a bank.

Interest Rates

As we have discussed, credit unions and banks offer lower interest rates than other lending institutions. The prime rate rise we saw in 2022 has helped level the playing field. The interest rates for both types of lenders are fairly similar in 2023. However, it’s impossible to predict what your exact rate will be until you have applied and been approved.

Interest rates will be determined by your financial history, your time in the business and the lender with. You can only get the best rate if you shop around and compare offers.

Offered Programmes

Alternative lending options for business are available to banks and lenders, but they can be more expensive than bank loans. Banks are more comfortable with traditional financing options like term loans and lines of credit. Alternative lenders can, however, offer revenue-based financing solutions and purchase order financing.

A bank or credit union might be more beneficial if you are only interested in core financing programs. If you are looking for specific financing solutions, however, it is a good idea not to work with a bank or credit union. Instead, explore other lenders and learn about their programs.