Is alternative lending right for you?
Back in the old days if a small business owner needed a loan for his business he walked down the block to the neighborhood bank branch and had a conversation with his banker. Today all you need is your smart phone and in a few keystrokes you could be approved! While this approach to lending is novel, it’s quickly becoming more popular but it’s not for everyone.
A Quick History on Alternative Lending
Credit unions, Community Development Financial Institutions, accounts receivable lenders and micro lenders are the original alternative lenders that most of us are familiar with. These organizations provided loans to small businesses that wouldn’t necessarily qualify for a traditional loan. In 2008 alternative lending really took off as big banks pulled back on small business loans, and a new marketplace was born as online lenders stepped up to fill the void. Technology was utilized like never before as online lenders created web based platforms that process loan applications faster then their brick and mortar counterparts. Loans are analyzed on a number of data points; credit scores, bank statements, even your social media accounts can be used to determine if you are a creditworthy borrower. Today there are dozens of options for any would be borrower to choose from. You can get a loan from a traditional banking institution, crowd source your loan from individual lenders all over the globe or apply online with one of the many online alternative lenders like LiftForward.
The Pros & Cons of Alternative Lending
Alternative lending is great when you need cash quickly, and most lenders will work on getting you approved and funded within just a few days. With traditional lenders you could find yourself waiting, waiting and then waiting some more as the process can take weeks or months. And since time is money, this delay can lead to missed opportunities
One of the biggest benefits of applying for a loan with an alternative lender is the much easier application process. Loans with your local bank or the SBA generally involve the submission of a long list of documents. Companies like LiftForward make it easy by allowing you to submit documents online, link your bank account to your application, and receive real time updates on your loan status.
A big draws of alternative financing is the greater leeway lenders have in who they approve. In order to qualify for a SBA loan or bank loan you’ll need excellent credit, along with a whole list of other criteria. While alternative lenders will want you to have good credit, they have more flexibility in who they approve and will take a variety of other factors into account when making their decision.
All this flexibility and quick turn around does come at a cost, usually in the form of higher interest rates, and keep in mind that alternative lenders are taking on a higher risk by providing loans to borrowers who are more likely to be rejected by the traditional bank. There are exceptions to this; if you have excellent credit and a profitable business you can qualify for a lower rate.
Another consideration is the loan term; alternative lenders generally require shorter loan terms which means larger payments for the borrower. If you’re a less than ideal borrower you can also find yourself making weekly or daily payments. This may not be a problem for some borrowers, but for others it could lead to some cash flow difficulties.
Another benefit of a traditional loan is that you’ll know your bank and banker. You’ll interact with them when setting up your account and making deposits, you can draw on that relationship when applying for your loan as they’ll be more familiar with you and your business. A bank manager will generally have some discretion in who they loan to and may be able to advocate for you to the lending department. With alternative lending chances are you wont have much opportunity to establish that same rapport.
The pros and cons listed are just a guide, and at the end of the day every small business is different and it’s important to talk to other small business owners. Your accountant or attorney before deciding which form of financing is right for you.
A Few Things to Keep in Mind
How good is your credit score? The higher the score, the better the borrower, and the more attractive you may be to lenders. Those with better credit scores are more likely to get approved for a traditional SBA or bank loan. Those with lower scores will want to consider alternatives, such as invoice factoring, merchant cash advance or exploring alternative lenders.
Don’t forget your business’s credit. It’s not just your credit you need to worry about, but also your business’s. Lenders will look at both numbers to determine if you would be a good borrower.
How long has my business been in business? A well established company that’s been around 50 years is going to have a much easier time getting approved for a loan than a startup of just a few months. The younger you are the more you’ll want to consider options outside of the big bank down the street.
When do you need the money? The faster you need the capital, the less options you have. Alternative business lenders like LiftForward work on getting loans approved and funded within just a few days, as opposed to the weeks it could take with other lenders and big banks.
Where does your revenue come from? The way you generate revenue may open up some lending doors for you. A bus operator that’s contracted by several schools in it’s district would have more options than a business that sells custom knitted sweaters from home.
While alternative loans can be quick and easy, they’re not for everyone or every business. Like with any decision it’s important to be an educated consumer and know your options. To learn more about LiftForward and it’s lending solutions give us a call at (888) 514–6539 or visit us at www.LiftForward.com.