4 Reasons 'Alternative Financing' May Be Right for Your Business Are your revenues less than $5 million? A traditional bank may reject you faster than you can say 'underwriter.'
By Larry Baker and Charlie Tribbett Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
So you've been turned down for a bank loan. Or perhaps you heard you would be, so you didn't even apply. Join the club.
Related: Why Alternative Financing Options Might Be Best for Your Small Business
In the world of traditional banking, small business loans have all but disappeared. This sounds like bad news for small businesses, until you realize just how robust the alternative lending space has become in recent years. With the many new sources of capital available, and the speed with which that capital can be raised, it's actually a great time to be a small business.
In a recent Goldman Sachs report, the company referred to these organizations as "shadow banks," defined as lenders operating outside the banking system. These new technology-driven lenders, the report predicted, are poised to defer some $11 billion in profit from traditional banks within the next five years.
And these lenders aren't just replicating what banks have always done; they're coming up with newer, faster ways to process and approve loans that make life a lot easier for business owners. Here are a few reasons the new world of online lending may be a good fit for you:
1. You make less than $5 million in annual revenue.
For big banks, it's no longer economically viable to work with small businesses with revenue under $5 million. Loans for these businesses are not only riskier, they promise a much lower return on equity, yielding far less profit for the banks. So, in the wake of the 2008 financial crisis, banks have weaned themselves off small business loans to focus on bigger fish which promise a bigger payback.
2. You can't stand paperwork.
It may be 2015, but applying for a loan from a traditional bank often still requires a fax machine. Remember those? The process of gathering supporting documents, faxing them to a loan officer and waiting for the officer to process the documents and respond -- even in the best-case scenario, with beneficial loan terms, and in the worst case, with a rejection -- can take months. That's time which cash-strapped business owners don't have.
Online lenders like LendingClub, OnDeck and our company, Bolstr, let you apply online, seamlessly uploading bank documents and other application requirements. They can even directly sync to an accounting system you use, like QuickBooks, without the hassle.
Related: Avoid These 5 Common Small-Business Financing Mistakes
3. You need a decision, fast.
Most alternative lenders use machine-learning technology, instead of humans, to underwrite loans. That means they use algorithms to determine whether a business is credit-worthy. Oftentimes, thousands of variables beyond your credit score and bank details are considered. That means that the technology can more precisely determine whether a business is capable of repaying a loan, which leads to more loans being accepted.
And, because it's all handled with technology, the system is able to make a decision within minutes, not months.
4. You want more flexible terms.
Banks more often than not offer businesses a one-size-fits-all loan that aims to give the bank, not the business, the most security. But in the ever-growing world of online lenders, you can find loans ranging from long term to short term and from high to low interest, for small-to-large sums.
While these options may feel liberating, it's still critical to watch out for high APRs and terms that fluctuate over time. Some online lenders advertise interest rates as low as 5 percent but add in hidden fees and strict repayment time lines. What's more, the implied cost of capital can skyrocket as high as 70 percent or more.
So, watch out for short-term loans, in particular, where the stated rate isn't actually the cost of the capital. When you consider the time value of money, the weekly or even daily repayments required cause the effective rates to be much higher than you'd expect.
Of course, plenty of online lenders operate above board. But, as a new industry, online lending is not as tightly regulated as traditional banks are, so business owners would be wise to do as much research on their lenders as the lenders are bound to do on them.
Related: Are You Ready to Seek Funding? This 10-Point Checklist Will Decide.
