Three Common Misconceptions About Alternative Financing

The internet is rife with misinformation. With the ability to share knowledge worldwide instantaneously comes the hindrance that not all knowledge will have been vetted before being disseminated.

Among this misinformation are some misinterpretations concerning the world of alternative financing, whether it be who the services are available to or the risks associated with this kind of financing. Let's investigate three of the most common misconceptions about alternative financing.

1. Alternative lending is exclusively for businesses that can't get traditional loans.

While the world of alternative finance does open doors to businesses that are usually left out in the cold when trying to access traditional loans, this inclusivity should not be misinterpreted as exclusivity. The truth is that alternative financiers exist to finance any businesses that meet their criteria, the exclusivity of which depends on the lender itself. Many alternative lenders have requirements, such as having been in business for one year at the time of applying, for example, but this is to ensure that loans are not handed out to businesses that may be at risk of defaulting on the payment.

The world of alternative financing is open and accessible for almost all businesses, with many companies turning to it due to the speed and convenience of the application process. Alternative lenders tend to focus on a quick preapproval process, with some lenders even providing funds in as little as 48 hours. The speed of accessing capital can be an advantage for any business, whether you have been denied a traditional loan or not.

2. Alternative lending is always more expensive.

It's true that alternative loans are often more expensive than loans offered by traditional lenders, but this is not a blanket statement that encompasses all alternative lending sources and does not take into account the overall cost of capital.

For some loans, the cost may be similar to or even less than traditional forms of financing. The truth is that the cost of your loan could weigh heavily upon items such as the annual revenue of your business or your credit score. This is the case with any form of financing, and the costs may also require you to dilute a certain amount of equity in your business, which may be more than you are willing to pay.

Alternative financing can offer shorter-term times than traditional loans. Again, this isn’t absolute. Each business is different, and loan terms vary widely. It’s always important to sit down and calculate how the interest rate and the term will cost your business throughout the payment process.

3. Alternative finance is always risky.

Alternative financing can come with certain risks. However, the risk assessment really depends on the financial health of your business.

For instance, a revolving business line of credit could be a good option for covering your business's short-term needs, such as equipment purchases. A business line of credit is a popular financial product offered by alternative lenders. The biggest risk is the possibility of defaulting on the loan, which can lead to penalties and damage your company's credit rating. Additionally, you could overextend the company's finances and become unable to repay the loan. In this example, the risk originates from potentially taking out too much and not being able to pay it back.

Defaulting on a loan is not a risk solely associated with alternative financing, though. This risk can apply to almost any loan, regardless of the source. That is why it's so important to take out an amount that is sustainable for your business and to make sure you fully understand the terms and rates over time

Alternative financing can also have shorter repayment periods. Some lenders may require that the loan be paid in just a few months, making it difficult for businesses that may need longer repayment periods to manage cash flow. However, what may be a risk to one business may be a boon for others who would prefer to have shorter loan terms.

Another risk with alternative financing is that alternative lenders can sometimes charge higher interest rates than their traditional counterparts, but this risk can be mitigated by ensuring you determine the overall cost of capital when working with a lender to confirm that you know the ins and outs of your rates and fees.

Alternative financiers themselves generally take on a variable amount of risk, as well. Since the requirements and conditions of approval are usually less stringent than those of traditional lenders, and because many alternative lenders do not take collateral for their loans, the lenders themselves take a fair amount of risk to provide businesses with the chance to grow.

Alternative financing offers flexibility and speed, but it isn’t one-size-fits-all. Each business should evaluate options carefully, understand repayment terms, and choose solutions that align with its cash flow and growth plans. By working with reputable lenders and asking the right questions, you can turn alternative financing into a strategic tool to support your business’s next steps. OwnerCo can connect you with trusted lending partners to help make the process smoother and more reliable.