How to Choose an Alternative Business Loan

How to Choose an Alternative Business Loan

If your small business is like most, you operate on a very tight budget and may need additional funds in order to take advantage of an opportunity that helps your business grow. If your business is a startup or doesn’t quite meet the bank’s requirements for a conventional loan, an alternative business loan may be a viable solution for your funding needs.

However, if your credit is good, you have time to apply and wait for a small business loan, the SBA 7(a), can give you better interest rates and longer repayment terms.

If you intend to use your loan to purchase real estate or long-term-use equipment, an SBA commercial loan, in conjunction with an SBA CDC loan can provide you with 90% of the financing required for the project and the lowest interest rates. If you need startup business loans or less than $50,000, microloans or alternative microloans are practical options to consider.

Is an Alternative Business Loan Right for You?

Alternative business loans are generally smaller than conventional bank loans, with available amounts starting as low as $2,000 and maximum amounts of up to $500,000. Terms are shorter, ranging from one month up to five years.

Interest rates are higher than conventional loans, with the best interest rates averaging from 6% to 25%, like Premier Business Lending whose rates start at 5.9%. However, some alternative lenders may charge much, much higher rates, since alternative lenders aren’t subject to the same regulations as banks.

The biggest benefit of alternative loans is that lenders are eager to lend to small businesses, even those that haven’t been in business for a long time or that have less-than-perfect credit. Because of this, alternative loans are easier to apply for than conventional loans, with shorter, less paperwork-intensive applications; most are online and can be completed in under an hour.

Alternative Business Loans: What Should You Look For?

Before you accept any loan offer, it’s important to read the entire contract and ensure that you understand exactly what interest rates, fees, costs and penalties you can expect and that you know exactly how much the loan costs in total, as well as upfront expenditures and daily or monthly payments.

You want to be ensure that you understand your obligations and repayment responsibilities, and that you have the means to repay the loan in full and on time.

Loan Amounts: The dollar amounts available to you varies from lender to lender, with the smallest alternative loans starting at $2,000, and the largest as high as $500,000, although most offer up to $150,000.

However, the amount that lenders are willing to extend may depend on your business’s health, which they evaluate using several factors, including your cash flow and your business and personal credit history.

Interest Rates: Interest rates are higher than you would expect to pay for a conventional loan, and may be expressed as a flat fee instead of a percentage-based interest rate, which can make it confusing to compare against other loan options.

Loans with terms of less than a year can also make it difficult to see the actual APR. You can find online calculators that can help you convert the fees and rates to an APR, which gives you a consistent number to use for apples-to-apples comparisons.

Be aware that the alternative lenders are not subject to the same regulation as banks and interest rates for some alternative loans may be exorbitant.

Fees: Most loans include an origination fee of up to 5% of your loan, although most average around 3%. Lenders may also charge an underwriting fee or a maintenance fee. Because fees vary from lender to lender, it’s important to read your contract.

If the fees you are quoted differ from the fees in the contract, you want to ensure that the lender updates the contract to reflect the quote they gave you before you accept the loan.

Repayment Terms: Alternative business loans have much shorter terms than conventional loans. Most offer options of less than a year, with the shortest having a term of just a month and the longest with repayment terms up to five years.

The average repayment term is between 12 and 24 months.If you’re small business needs a loan in order to take advantage of a time-sensitive opportunity, or if you don’t quite qualify for a conventional loan and need an influx of funds to help your company grow, an alternative business loan can be worth considering.

The Growing World of Alternative Small Business Lending

The Growing World of Alternative Small Business Lending

These days there’s nothing traditional about small business financing. You see, the credit crunch of 2008 created a lending gap: Traditional banks want to loan a half-million dollars or more, but most small businesses only need $250,000 or less.

Traditional lenders rarely look twice at a small business any more, and when they do, only 20% of applications pass muster. These are not very encouraging numbers for small business owners who want to take it to the next level sometime this generation.

What’s a small business owner to do? SBA-backed loans are still the most affordable, but they take forever to process, require a back-breaking pile of paperwork, and are only given out to a very select few since the rules are so strict.

Luckily, nature abhors a vacuum. To fill in the gap, the list of alternatives is growing all the time, which is both a good thing and a bad thing, depending on how well you handle a headache-inducing list of options. Lines of credit, term loans, factoring, merchant cash advances, invoice financing—look, it’s great to finally have choices, but it all sounds like synonyms for “out of my league.” So how do you know what’s right for your business? Glad you asked.

Let’s start with online, also known as alternative, lenders. If an established business can show it is growing successfully, an alternative lender will often provide an infusion of capital to keep up the momentum because they believe in the company and its owner. Since you are not dealing with a bank, but a company that is lending its own money, their analyses and criteria are very different from a bank’s.

It’s also faster and easier to get approved than it would be at a traditional bank, though neither the fastest nor the easiest. Their offerings range from term loans to lines of credit, inventory financing to receivables factoring.

If you want something even faster and easier, consider daily debit or merchant cash advances (MCAs). An MCA lender gives the owner a pile of cash in return for a percentage or flat amount of the business’s daily sales. The great part is how quick they are, and they are even less stringent than online lenders that offer more traditional financing options like term loans and lines of credit. The not-so-great part is the extremely high rates you pay for your money. Also, if your income tends to fluctuate month by month, or day to day, this may not be the best option for you.

In the world of small business financing, the more options, the better.

Alternative Lending: When is it a Right Fit for You, and When is it Not?

Alternative Lending: When is it a Right Fit for You, and When is it Not?

You don’t have to walk into your local bank to a get a small-business loan these days. Alternative lending options are just a few computer keystrokes away.

And they’re becoming more popular.

Online lenders, which offer the most common forms of alternative lending, approved 71% of the loan applications they received from small-business borrowers last year, according to a 2015 survey by a group of Federal Reserve banks. That’s the second-highest rate after small banks, which approved 76%, and much higher than the 58% approved by big banks.

But alternative business loans can be complicated and confusing, even risky. They’re not for everyone.

In fact, only 15% of small-business borrowers in the Federal Reserve survey said they were satisfied with their experience with online lenders, the lowest rate among financial institutions in the report. (That compares to 75% for small banks, 56% for credit unions and 51% for large banks.) The top reasons for dissatisfaction given were high interest rates, unfavorable repayment terms and a lack of transparency.

So when is alternative lending good — or not so well — for your business?

Alternative lending is good when you can’t get a bank loan
Alternative lending took off in the wake of the 2008 financial crisis, when banks pulled back dramatically from issuing small-business loans. Online lenders stepped in to fill the void, creating Web-based platforms that could quickly process loan applications, providing relief for small-business owners turned away by banks.

Technology was a key factor in this development, as it allowed new players to swiftly evaluate the creditworthiness of borrowers. Online lenders use different types of data — bank statements, tax returns, online accounting sites and even social media accounts — to analyze potential borrowers’ personal and business finances.

There are four main kinds of alternative or online financing:

  • A term loan is a lump sum you borrow and repay in about four or five years based on set terms, including the annual percentage rate. This is generally the least expensive type of financing.
  • A line of credit gives you access to a set amount of cash that you tap when necessary. This is generally used by businesses that need short-term financing to bridge cash-flow gaps.
  • Invoice factoring, also known as invoice financing or accounts receivable financing, is an option for small businesses that deal with unpaid invoices. Instead of just waiting to be paid, you can get an advance on those invoices, which you then pay back along with a fee when your customers settle their accounts.
  • Merchant cash advances offer a way to get an advance on future credit card or debit card sales. They’re easy to get, but think twice about applying because merchant cash advances are typically very expensive. The APR can range from 70% to 350%.

Banks still offer the best deals, especially federally guaranteed SBA loans. But those are usually tough to get, and you have to deal with stringent requirements and a long wait.

Alternative lending is good when you need quick cash
Alternative lending offers a way to deal with a pressing business need or an emergency. If your plumbing goes out or you suddenly run out of supplies, you can’t really wait weeks, or even days, to fix the problem. Quick access to capital helps you deal with the problem immediately.

With bank loans, especially financing backed by the Small Business Administration, you have to submit a long list of documents, including any business leases and a detailed financial history. In contrast, many online lenders require fewer documents. And for many online lenders, the main focus is whether you have the cash flow to make the payments.

In addition, you can get funds from alternative lenders within days, even a few hours, and the requirements are typically easier to meet.

Alternative lenders also provide longer-term loans to invest in growth, such as opening a new store or hiring more workers. Of course, as noted, in exchange for quicker and easier access, your borrowing costs are likely to be higher.

Alternative lending isn’t good when you get stuck with high APR, steep payments
Getting quick and easy financing has a price. Online lenders generally charge a higher APR, which is the true cost of the loan, including all fees.

A few online lenders offer APRs in the single digits, but you need excellent personal credit and a profitable business to qualify for them.

Most alternative business lenders offer loans with double-digit, even triple-digit, rates.

That’s because most online lenders get their funding from capital markets, so their lending costs are higher than those of banks. And lenders are taking on higher risk to extend credit to borrowers who are likely to be rejected by traditional banks.

Most online lenders also require shorter loan terms, which mean higher regular payments.

Evaluate small-business loans carefully
Alternative lending has multiple upsides — among them, speed, convenience and looser requirements. But it’s essential to compare loans by APR and make sure you can handle the required payments.