Since the economic collapse in 2008 most traditional banks have become extremely cautious in funding small businesses.
It was the small businesses that were affected the most during that time and around 2009 banks were approving loans for small businesses at 58% with up to $1 million.
However, by the year 2015, the number of loans being funded through banks dropped down to around 43%. This created an opportunity for outside working capital funding sources known as “alternative lenders”.
These alternative lenders have been willing to take on more risk and often fund loans to businesses with credit scores that typically would be rejected by a bank.
These alternative lenders have assisted countless small businesses throughout the years, but it’s not without a drawback. You should weigh the pros and cons of each business funding type to determine what’s best for your situation.
5 Advantages of dealing with an alternative lender
1. Fast and simple application process
The majority of alternative lenders have structured the loan application processes. Generally you’ll simply need to submit simple business details and some business finance data.
Those applying can get to finalize the application in as easy as a quarter-hour with some tech-savvy and modern lenders.
2. Funding can reach your bank account in one business working day
Supposing your application is permitted, the cash can appear in your business’ bank accounts within 24 hrs if there are no other issues or concerns.
With money in hand, you could start developing your business immediately.
3. You can obtain a business loan although you may have poor credit or no credit
Alternative business lenders have more convenient borrower prerequisites often. In case your business hasn’t possessed luck getting funding from traditional financial corporations, you’re likely to have better luck through an alternative lender.
4. You could use the business funds for whatever, you see fit
A great number of small business alternative business loans are expected to be utilized in very specified possibilities. For instance, if you possess a construction company and apply for a loan with the motive that you’ll use the money to purchase a new piece of equipment, that’s just how the lender expects you to invest it.
Generally, non-bank loan providers need no such conditions and terms on their loans. The capital can be employed by you to grow your business.
5. You can form a bond type relationship with the lender and get smaller interest rates
You can connect with the correct lender and pay back the amount owed on-time and you might be able to continue the partnership in the near future. In time, you may be able to get lower interest on the loans you take out.
5 Facts to consider before dealing with an alternative lender
1. Alternate lenders occasionally charge increased interest rates
By working with an alternative lender, you could experience higher interest rate levels than you would if you caused a traditional bank.
Much like any loan, if a loan is got by you from a traditional loan provider and face unanticipated limitations which can cause your business to become sluggish, it could become really difficult to pay back every month installment payments on time.
2. You might only be able to get a huge loan
Some alternative lenders could be hesitant to indication off on smaller loans, like traditional banks just. For example, the lender may necessitate that business loans are at least $50,000, or even more.
Whilst a loan of this size could assist quite a few businesses increase certainly, not all small enterprise needs to take on that much arrears.
For instance, you might only desire a few thousand us dollars to help cover working expenses while you’re longing on customers to stay their accounts.
For some small business owners, it doesn’t seem sensible to obtain a massive working capital loan unless it’s absolutely necessary.
That’s why it’s important to determine the minimum quantities you could possibly borrow when you’re assessing a non-bank lender.
For example, some lenders offer approved customers the capability to draw in amounts no more than $100 up with their borrowing limit (potential $100,000), in order to raised fit the specific requirements of steadily building and smaller businesses.
3. Alternative lenders may go out of business
Since alternative business loan lenders are new relatively, there’s a possibility that they can go out business. Think about your non-bank lender at he closes its doors.
How would that impact your business? When deciding whether to utilize an alternative lender, it’s a good idea to take a look at them in the same way as you might look at any other business before deciding to trust them and negotiate with these businesses.
You’ll need to look into a few things which can include: Do we know if they’ve been in business for at the very least a couple of years? Are they well-funded?
Are they supported by the best banks or have a way to obtain capital when needed? Is there reliable assistance personnel for you to speak to if you have questions? Do they have a lot of positive customer experiences and reviews?
4. You might not receive any price reduction if you pay back your loan early
Let’s say your business has been a lot more robust than you projected. You took an 18-month loan out 10 calendar months ago, but you’re ready to repay it. Despite your early on repayment, your lender might not give you any prepayment discounts.
This lender is different in this respect, since the fees are all flat and usage-based: If you receive capital through this lender, you have the option to settle early on always, saving a huge amount of cash on charges.)
Whatever lender you choose to use, you’ll want to be sure to ask about any extra fees or repayment penalties. And about those service fees…
5. Several alternative lenders may add hidden fees
Before any contract is signed by you, look over the small print and ask some questions. Some lenders may add on disbursement fees, origination fees, repayment fees and even more.
Complete your homework to ensure you’re not astonished whenever your initial invoice for installment arrives.
We highly recommend requesting a copy of every service fees which the alternative business loan lender may well charge just before you sign any agreements.