The Pros and Cons of Alternative Business Loans

Last Updated Jun 3, 2020 | Published on Oct 7, 2019 | Small Business

The economic decline back in 2007 to 2008 has made a lasting impact on traditional financing institutions. Since then, banks have become reluctant to finance businesses, particularly startup companies and small businesses. However, this doesn’t change the fact that small businesses still need funding. This need provided an opportunity for non-bank lenders to enter the market and offer alternative loans to business owners.

What are Alternative Loans?

Alternative loans are loan products offered by alternative or non-bank lenders. You can choose from a variety of loan products such as a business line of credit, multi-year term loans, a merchant cash advance, and more. Alternative loans are best for small business owners in need of funding but can’t qualify for traditional loans. Additionally, it’s also beneficial for business owners that need immediate funding.

To know more about alternative loans, here are the pros and cons of this kind of business funding.

Pros of Alternative Loans

The following are some of the advantages of working with alternative lenders:

1. Flexible Qualifications and Requirements

Loan application requirements from banks are stringent and tedious. On the other hand, alternative loans have less stringent qualifications. While you still need to demonstrate your capacity to repay the loan, the entire process is more flexible than traditional loans.

2. Perfect Credit is Not Required

Alternative lenders have more lenient qualifications. If your business didn’t qualify for loans from traditional lenders, you’ll most likely qualify for alternative loans from non-bank lenders. You don’t need to have perfect credit and established business history.

3. Faster Approval and Funding

Traditional lenders such as banks and credit unions take a long time to process and approve business loans. Sometimes, you might even end up waiting for weeks or months without the guarantee of approval. This obviously isn’t viable for businesses that need immediate funding. On the other hand, alternative lenders often approve loans within 24 to 48 hours. Additionally, the underwriting process happens online. All you have to do is fill out an application form that takes no more than five minutes of your time.

4. Flexible Use of Funds

Many small business owners apply for loans to fund entire business operations. However, some small business loans should only be used in a certain way. Let’s say you stated in your application that you’re planning to use the funds to purchase equipment. Traditional lenders may require you to spend the funds from the loan solely on equipment. On the other hand, alternative lenders allow you to use the money as you see fit, as long as it’s for the benefit of your business.

Cons of Alternative Loans

The following is a list of the disadvantages of working with an alternative lender:

1. More Likely to Go Out of Business Compared to Banks

Banks are more established than alternative lenders, which means that non-bank lenders could go out of business. It’s important to do your research before working with an alternative lender. Read reviews, ask for referrals, and make sure they have enough experience before you partner with them. You might want to ask them a few questions and closely examine important factors such as:

  • Are they supported by a reputable source of funds?
  • How long have they been in business?
  • Did they get good reviews from previous clients?
  • Do they have a friendly and knowledgeable staff?

Related: Important Questions To Ask Lenders

2. Higher Interest Rates

Working with alternative lenders may mean paying more on interest rates. However, your interest rates are usually relative to your credit rating, cash flow, and business history. If you’re a prime borrower, you’ll likely qualify for competitive interest rates.

Related: How to Review Your Business Credit Report

3. Hidden Fees

Prior to working with an alternative lender, be sure you read the fine print. There are lenders who will charge you with origination fees, repayment fees, and more. Make sure to ask potential lenders about the fees they’re going to charge before doing business with them.

4. No Prepayment Discounts

Many alternative lenders don’t give prepayment discounts for early payments. If prepayment discounts are a huge deal for your business, ask about it upfront. The same goes for other concerns such as additional fees and repayment penalties.

Learn More About Your Alternative Loan Options Today!

We’re well aware that business owners have a lot on their plate. However, it’s important to take the time to understand the alternative loan options available to you. Weigh your options and be familiar with the pros and cons of each loan product before you make a decision. Taking out a loan is a huge investment, so be sure to do thorough research, just as you would when looking for profitable goods and services. The loan product you choose should align with your business’ financial capabilities, and make sure to work with a reputable lending company.

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