Traditional Versus Alternative Small Business Loan Lenders
During the economic recession, many banks and other traditional lenders were reluctant to loan to small businesses. Many of these businesses turned to alternative lenders to meet their financial needs. Although the loan terms were less favorable and the interest rates were significantly higher, many business owners accepted loans from these nonbank alternatives.
Now that the economy has recovered, lending is quickly rising to prerecession levels. However, many small business owners are still considering alternative loan sources. Learn about the advantages of both types of lenders below.
Advantages of Traditional Small Business Loan Lenders
Banks and credit unions loan billions of dollars each year to qualified applicants. While small business owners can apply to banks directly for a small business loan, loans guaranteed by the Small Business Administration have significant benefits. Banks are also more likely to loan to small business owners who have passed the SBA application process.
- Traditional small business loans, especially those guaranteed by the SBA, offer lower interest rates than most online and alternative lenders. In some cases, a bank loan will have an interest rate that is less than one-third of an alternative loan's rate.
- Banks can offer loans with 10-year repayment terms, which allows the business to repay the loan in smaller installments. Alternative lenders prefer shorter terms and may require repayment in as little as 12 months.
- Traditional lenders are willing to make larger loans to qualified small businesses.
The Application Process for Traditional Small Business Loan Lenders
In most cases, the best loan terms are available for small business owners who qualify for a SBA-guaranteed loan. Business owners who think they qualify can contact the SBA, which will help walk each applicant through the loan process. No matter which traditional lender they go to, loan applicants should expect to provide personal and business credit reports, financial records, cash-flow estimates for at least one year and a detailed business plan.
Advantages of Alternative and Online Small Business Loan Lenders
Alternative small business loan lenders aren't banks or credit unions. Instead, these nonbank institutions offer quick decisions and fast cash. In 2012, the Wall Street Journal estimated that these alternative lenders lent approximately $3 billion.
- Alternative and online lenders can deliver funds faster than traditional lenders. A SBA-guaranteed business loan can take 30 days to process, while an alternative lender can provide cash within a week or less.
- The application process is often less rigorous for alternative loan lenders. While many small business owners consider this a significant benefit, it also increases the chance that the business may default on the loan.
- Businesses can apply for small loan amounts with alternative lenders. Banks and credit unions tend to favor six- to seven-figure loan amounts. However, new SBA programs were launched in 2011 to serve small business owners who want smaller loan amounts.
Small Business Loan Application Process for Alternative Lenders
The loan application for alternative lenders varies widely. As reported in the Wall Street Journal, Swift Capital used financial records, online reviews and a secret shopper to determine whether or not a nail salon qualified for a small business loan. However, just like traditional lenders, financial records are an important part of the loan approval process. Good credit and positive business cash flow is essential. Alternative lenders will also want to know how the loan will benefit the business.
Alternative lenders help small business owners with less than perfect credit get cash quickly. These lenders are also popular with small business owners who want a small five-figure loan. However, small business owners can find better loan terms from traditional lenders, like banks and credit unions. If the business owner gets approved by the SBA, they'll have access to even better loan rates and educational resources. However, for business owners who cannot secure a traditional loan, loans from alternative lenders remain a compelling alternative.
- Traditional lenders can offer larger loans at better interest rates. Ten-year repayment plans are often standard.
- Alternative lenders offer smaller loans to businesses who need money quickly. However, interest rates can be excessive.
- Expect to wait at least 30 days for funding from a traditional bank. Alternative lenders offer cash in less than a week.