Are There Alternatives to Borrowing From a Bank?

Are There Alternatives to Borrowing From a Bank?

Business people and individuals often find it more advantageous to apply for loans from lenders than mainstrean banks – why are certain lenders better than borrowing from a bank?

 

There are a number of commonly cited reasons for this trend, one that’s become quite pronounced since the financial crisis several years ago – a crisis that many businesses and individuals are yet to fully recover from –  however, it must be pointed out that there are different benefits to borrowing from different sources.

Obviously, the benefits afforded to an individual borrowing from a payday loan provider or using bad credit loans would differ to the benefits afforded to an entrepreneur borrowing in a peer-to-peer situation, so when discussing the benefits of borrowing from lenders over banks, considerations like this must be kept in mind.

Payday Loans

These short-term, unsecured loans have been available for quite some time now, though they do tend to get a bad rap, mostly because those who find themselves in hot water have borrowed irresponsibly.

For business owners and individuals alike, payday loans have some distinct advantages over borrowing from banks – they’re easy to apply for as they offer easy, often online, application processes, they offer fast access to cash once approved, and lenders are usually willing to work with people with poor credit ratings.

However, the interest rate (APR) applied to these short-term loans is usually far higher than the rates banks offer, so this important consideration must be taken into one’s estimations when deciding whether to apply for a payday loan.

Crowdfunding

Not a loan per se, crowdfunding is still, at the end of the day, a form of borrowing because what’s been borrowed must naturally be paid back, even though it’s usually not in the form of currency.

With its roots in outsourcing, crowdfunding has gained popularity at a rapid pace, due much in part to leading crowdfunding websites like Kickstarter, and is now a highly sought after means of raising capital amongst businesses and start-ups.

Crowdfunding has a number of advantages over borrowing from banks, including:

  • It provides access to capital without accumulating debt or giving up equity
  • It provides proof of a worthy concept, i.e. market validation, at an early developmental stage
  • It’s easier to apply for than a loan from a bank (though it generally takes longer)
  • It provides entrepreneurs with the opportunity to pre-sell their products

Unsurprisingly, business owners and entrepreneurs have taken to crowdfunding in a big way, and it’s certainly something to take an interest in if you’re trying to fund a project and want to pursue methods of raising capital that don’t entail applying to banks and lenders.

Peer-to-Peer Lending

This form of lending has really started to come of age over the past year or so; moreover, unlike crowdfunding discussed above, which is similar to business loans in several ways, it’s a borrowing option available to both businesspeople and individuals.

The vast majority of P2P (Peer-to-Peer) loans are small unsecured loans for individuals; however, there are a number of P2P platforms for business owners and entrepreneurs to arrange finance through.

As with traditional loans and application processes, borrowers are first assessed for risk, with those considered to be a lending risk – i.e. there’s a greater risk of them defaulting on the loan – given a higher interest rate to hedge against that perceived risk of default.

This has often resulted in borrowers with poor credit ratings finding it more difficult than other borrowers to access finance – most of these businesspeople and individuals would also find it difficult to successfully apply for loans through banks and lenders – though there are a number of advantages for borrowers who choose to borrow in a P2P situation, including:

  • It can prove easier for borrowers to be approved for loans because of the charitable aspect of P2P lending
  • Peer-to-peer loans are generally easier to apply for than traditional bank loans
  • There are now a number of P2P ‘lenders’ to apply to and more are appearing all the time

Depending on a business person or individual’s situation, there are now a number of borrowing options afforded to them should they choose to make the most of what’s available, and indeed many of these borrowing options will prove better to apply for than borrowing from a bank.


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