Alternative credit has become of the largest growing areas of the financial sector. Many companies have embraced the most sophisticated underwriting tools available to add all sorts of flexibility to the loans that they offer. These efforts are being taken advantage of by thousands of businesses around the world.
Many of the companies that utilize alternative financing would not have been able to survive without this financial lifeline. Understanding the benefits of this unique form of financial assistance can be enormously helpful to a company and can ensure its survival.
Larger Credit Amounts
Alternative financing sources will often pay out larger loans than a traditional credit company. Banks and credit unions have a strict set of parameters that they study when determining what sort of loan to give a business. They look at earnings, the frequency of payment, and the general plan behind the business. A business owner often has to go through weeks of effort to craft the perfect proposal for a loan or line of credit.
Their fees are often high and a large percentage of proposals are rejected in the first place. Banks are still somewhat uncertain about doling out credit in the years after the Great Recession. Alternative financing, on the other hand, uses a different set of rules and parameters. These companies have made it their business model to aid the businesses that were mostly ignored by traditional banks.
They can use sophisticated tools and technologies to figure out the likelihood that a company will pay back their loan on time. These tools can help an alternative financing company determine which borrowers are actual credit risks and which borrowers simply have unconventional business structures and would be good borrowers.
Longer Timelines
Alternative credit sources also give much longer timelines than traditional credit. A company may have years to pay off a particular debt when they would have only had months with a bank or credit union. More time to pay means that a company’s finances can be more flexible.
They can put money down on a large capital improvement or focus their capital on paying for debts that they have already taken out. Some companies institute balloon payments at different points. A balloon payment may be scheduled in the weeks after the company receives some sort of large payment.
While banks can often have a balloon payment in their loans and credit lines, it is often either at the beginning or the end of the loan period. Companies can offer balloon payments at a wide variety of times. They simply sign a contract stating when and how they should be paid and the company meets those obligations in order to remain credit worthy.
More Flexible Terms
Alternative credit can be helpful for a business with a non-traditional payment structure. There are many businesses where the company in question does not know exactly how much they will be making over each quarter. Their pay is sporadic and there is a chance that some of their clients will not pay what is owed. Alternative financing helps companies work through these constraints.
It can be effective at allowing a company to make payroll on a regular basis and pay their bills. It can also be helpful in letting a company pay off their more damaging debts from traditional lenders. Debts that have double digit interest rates often need to be paid off faster than those with smaller rates. Paying the debt off increases the amount of money the company has on a monthly basis to meet their other obligations.
Companies also have the ability in some alternative financing structures to miss a payment and not be charged later on. Missing a payment is often a massive problem for a company with a traditional loan. In some instances, the loan is cancelled or the company starts charging massive penalties.
Some contracts for alternative financing companies include provisions for missed payments. These companies know that a missed invoice or an adverse weather event can occur and keep a company from paying what they owe even though they are usually credit worthy. It can allow that company to keep their loan over time.
Wrap Up
Companies that are having trouble finding a financial lifeline from banks should not shut down. They should also not enter into financial arrangements that will harm their ability to succeed in the future. Predatory credit lines will only cause problems for a business moving forward. Instead, companies with money troubles need to look at sources of alternative financing.
They should prepare their portfolio and act as if they are applying for a loan for the first time. In addition, they need to remain flexible and figure out what about their financial situation can be most easily modified. This flexibility will be essential in securing the alternative financing funding they need to stay afloat.
