When looking to take the next big adventure with your business, it can really be a jungle out there. There are so many different routes to take, each with its own benefits balanced with unforeseen pitfalls that can cause some turbulent traveling later on down the road.
With this being said, it’s essential to ensure you are armed with the knowledge that empowers you to make the right decisions needed to lead your business to the next level. The first tool in your belt should be confidently understanding the difference between small business loans and alternative lending as this will be the first crucial choice when planning your route and selecting the wrong option can have consequences later down the line.
A small business loan provides you with access to capital so that you can invest it into your business. A portion of these loans is guaranteed by the government allowing the business owner to access capital with less equity than a conventional loan would usually require.
These loans come with a guarantee that the lender will be reimbursed for a percentage of the debt if you default on the loan, reducing the risk to them. There are several different types of these loans at your disposal with the guaranty percentage and loan amount varying from loan to loan.
Broad eligibility requirements are a massive attraction when it comes to small business loans. These can often be a lot easier to qualify for than traditional loans resulting in a higher approval rate. Some eligibility requirements are as simple as being a registered and legal for-profit business, being physically located in the United States or one of the U.S. territories, having your own time and money invested in the business, and previously being unable to acquire funding through another financing institution.
These loans have capped interest rates, keeping them affordable for borrowers as they are subject to Small Business Administration maximums. By offering a range from $500 to $5.5 million, small and large expenses can be covered, however, this money can only finance fixed assets.
On the counter side, the application process for small business loans can be quite arduous and requires you to jump through multiple hoops before you get anywhere near the funding amount that you are asking for. With applications taking as long as two months to get approved, and secondary approvals often being required, small businesses are really hindered from accessing the funds that they need, when they need them.
Some institutions may even require that you leverage collateral to receive the funds you might need in addition to typically making a down payment ranging from 10% to 20% of the total loan. Lenders are also more likely to work with borrowers who are willing to invest equity in their business, resulting in a dilution of shares.
Some business owners can be discouraged from approaching the application process as lenders are typically unlikely to grant funds to those with lower credit scores. A personal FICO Score of at least 680 is usually used as the minimum for approval.
Alternative lending (or financing) is simply an alternative to business loans that aren’t tied down with the arduous process of traditional bank lending. Alternative lenders are typically online-based, private companies that fill the gaps in service that traditional banks offer.
This type of lending has surged in recent years as it is viewed to be more accessible for smaller businesses, becoming a reliable source of financing for small businesses.
Alternative financing comes attached with a multitude of benefits. The application process itself can take as little as 3 minutes to complete with pre-approval arriving in your inbox in 24 hours. This empowers businesses by giving them quick and easy access to the funds that they need when they actually need them.
This leads to another significant benefit in that there is a drastic reduction in the documentation required to apply for alternative financing, saving you even more time scouring through files and paperwork. In some cases, the only paperwork required is as little as your credit score, your annual revenue, bank deposits, and a brick-and-mortar address for your business.
There is also a lot more freedom in regard to terms and rates. While small business loans can often be more stringent in what they are able to offer, alternative financing options tend to provide more favorable term lengths with much lower interest rates due to having a diverse and competitive market to shop in.
This is all in addition to the constant innovations that fintech continues to contribute to this industry as technology advances at an exponential rate.
However, everything comes with a catch. In terms of alternative lending, with it still growing as an industry, the landscape is relatively lacking in terms of regulatory oversight in many jurisdictions. Financial regulators are still catching up with the waves of innovation that financial tech has brought, and this could result in an increased risk of fraud losses but this falls to the lenders and would only arise if strict audits are not done in conjunction with regulated financial institutions.
Alternative lending provides a higher risk for a reward that is balanced out with a higher risk of loss—this burden is shouldered by the investors in this industry and not the small business owner seeking to borrow. This is due to the fact that the majority of alternative lenders won’t require you to leverage collateral, down payments or your equity.
The truth of the matter is that while both options are available for you to reach out and take advantage of, the path to getting approval for a small business loan is a narrower margin than that of alternative financing.
It’s fine if you are a bigger business with a staff that can dedicate large amounts of time to securing funding through a long and arduous application process. However, many small businesses often won’t have this luxury of support or time to navigate the choppy waters of big banking, especially if they need quick access to funds in order to succeed in operating or quickly expanding. It can take months to secure a small business loan meanwhile alternative financing has a turnaround time that actually works for your business.
More so, the success of alternative financing is hinged on the success of your business. Since there is usually no collateral with alternative financing, it’s imperative that businesses have the chance to expand so that backers can also grow. When you win, everyone wins.
At Backd, we are in the business of funding dreams and possibilities. We believe that our success is hinged on that of you and your business, and the path to that starts by removing any financial roadblocks that may stand in your way. Whether you need working capital to enable you to quickly and easily bridge cashflow gaps or a business line of credit to cover short-term needs such a payroll or equipment purchases, we have your back. Equip yourself for success today by applying in minutes or learn more by talking to our team at (737) 256 7458.