Most small businesses start at a disadvantage financially when first opening their doors. Obtaining business loans the traditional way is often impossible. This is due to a lack of credit history for the new business, a less than favorable credit rating of the company’s owner, or a lack of collateral to use to secure a loan. However, there are alternative loan options for small businesses that find themselves in this situation.
Alternative lenders often provide quicker, short-term financing for small businesses. They are often based online with manageable interest rates and eased loan requirements. However, it is also easy to fall prey to scams offering loans to businesses. Selecting one with a proven track record and having realistic expectations in regard to what a lender can legally offer is critical to making a solid decision. The following alternative lenders, and how to discover the best fit for your business, are provided below.
What are your needs?
Before researching alternative lenders for your business, you must determine how you will use the money. Most alternative lenders offer money in the following categories:
- Cash advances against credit card income
- Equipment purchase loans
- Equipment lease loans
- Business loans (operating capital)
- Mortgage loans
Criteria Alternative Lenders Use for Approval
Alternative lenders consider how long your business has been operating, whether you have a business plan for growth and the owner’s credit score. You will be asked to provide an accounting of grow annual revenues as well as annual profits. If you have any assets or collateral, this must also be mentioned. Alternative lenders do charge higher APRs and fees, as well as higher interest rates.
OnDeck Lending
This is a company with excellent ratings with the Better Business Bureau with a quick decision-making process. The APR is reasonable compared to others, though if your credit is very bad it can elevate. The company will loan up to $500,000 with many flexible payment plans that extend to three years. There are origination fees, but this is waived after your third loan with them as a loyalty incentive. They only offer term loans and lines of credit. You are required to make fixed weekly payments and must have been in business for at least one year. A qualifying credit score is just 500, but you must have annual revenue of at least $100,000. Expect the following fees:
- 5-4 percent of the term loan amount as a processing fee
- APR: base 13.99 percent (can go as high as 39.9)
- Lines of credit: $20 monthly maintenance fee. After six months this is discontinued.
Funding Circle
This is an online marketplace that connects small business owners with investors interested in assisting in the growth of the business. Interest rates with this company begin at 8.44 percent and it has a sterling reputation with the BBB. They only offer term loans and equipment loans, but the terms can be for as long as five years. Fixed monthly payments are required, and the minimum loan amount for the term loans is $25,000.
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There are no origination fees or prepayment penalties, but you must have been in business for at least two years. Other costs include a processing fee of .99 percent to 6.99 percent of the loan amount.
Torro
If you have been turned down by other lenders, this lender tends to offer flexibility that allows businesses to qualify easier. The company provides a consulting service for all new clients and has a good rating with the BBB. Torro has one of the highest loan amounts for merchant cash advances in the industry. However, even with this, they require a minimum credit score of 650 and a business plan.
You cannot have any past or recent bankruptcies and you must be prepared to show tax returns for several years to prove income and viability. Collateral may be asked of you if your credit score is not high enough or other criteria are not met. Torro offers a wider array of investors and brokers to select from which increases the likelihood of finding funding higher. They only offer money for lines of credit and merchant cash advances, with $5,000 as a minimum loan amount. Length term varies depending on the lender selected.
Alternative Lenders vs Traditional Lenders
One of the major differences between alternative lenders and bank lenders is in the approval rating. Banks tend to approve loans between 13-20 percent, on average, over the last five years. Non-bank, alternative lenders approve, on average, 61-64 percent of applications submitted. Additionally, alternative lenders have less paperwork to fill out and faster fulfillment. However, compared to a traditional bank, the fees, interest rates and APR are often much higher with an alternative lender.
Alternative lenders offer flexible terms as compared to banks. This is because non-bank lenders have the ability to be creative with their loan products, and they are not regulated by the rules that often hinder larger banks. Additionally, alternative lenders tend to offer smaller-scale loans as compared to banks. The downside to working with alternative lenders is that it is more expensive to do so. The products you qualify for will come at a cost to you and the amounts loaned are typically smaller with shorter terms. Often alternative lenders require frequent payments, as often as weekly payments, in order to remain in good standing. Some require daily payments. Bank loans utilize the monthly payment structure.
A recent report produced by Goldman Sachs predicted that non-traditional banks will see increased growth through to 2025. Currently, the market share is two percent of a large $843 billion market, with projects for its expansion to a 15 percent market share by 2025. The emerging technology has positioned the non-bank lenders to make key inroads with borrowers, offering a more streamlined experience. In addition, the reports states, the combination of the easier application process with the restrictive capital requirements by banks has produced a climate where alternative lenders can flourish.
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