If you own or run a small business, there is a large chance that at some point in your business’s lifetime, you are going to need capital to fuel growth. It’s one of the highest priorities, as well as largest obstacles, for small business owners.
Small businesses are the backbone of our economy and cash flow is their lifeblood. When they need cash to run and grow, they should be able to access it.
However, a disappointing trend has started to take place with small business lending. Banks, the traditional source of funding for small businesses, have drastically cut their loans to SMBs. In fact, about 82% of small business loan applications are denied by the bank.
Coming off a tremendous recession, banks have become more risk averse. Small businesses are inherently riskier than larger businesses, which forces banks to be more hesitant in doing business with them.
Secondarily, small businesses are usually seeking smaller loan amounts. They often just need $20,000 or $50,000 to get where they need to go. But, for banks, it costs them just as much to underwrite a large loan as it does small one. So, for any loan under about $1 million, the bank is essentially losing money.
What does an entrepreneur do if he needs a business loan?
If you have a strong financial history (both as a business and an individual) you still might want to try the bank. You will find the lowest-cost loans at the bank. Be prepared that bank applications are incredibly lengthy and the time to funding can take months. If you need cash fast, the bank might not be the best option.
If you are denied by a bank, don’t have time to go through their process, or are unsure of your financials, you should take a look at a whole new industry of “online lenders” or “alternative lenders” that have rose up in response to the banks being MIA.
The alternative lending industry is booming, doing over $3 billion in loans in 2013. They also are approving about 60% of applicants, giving you a strong chance of finding working capital.
Here are some things you need to know about alternative lending:
1. Faster Time to Funding
Online lenders have the capability of getting cash into the hands of borrowers much faster than banks.
One reason this is possible is because the applications are shorter. Many alternative loan applications can be completed in minutes.
Secondarily, these lenders have faster approval times as they are net-natives. Due to the online nature of their business and their technology-enabled algorithms, some alternative lenders are able to get funding to borrowers in as little as 2 days.
2. Diverse Products
Another interesting aspect about online lending is that it offers a diverse range of products. Beyond traditional term loans and lines of credit (which are also available through online lenders), borrowers have access to products such as short-term loans (some as little as 3 months), invoice financing and equipment loans.
This offers borrowers an advantage if they have or potentially have particularly strong collateral (such as invoices or equipment), or only need a quick cash infusion and don’t want debt on their books forever.
3. Options for Those With Bad Credit
Alternative lenders are able to take on more risk than the banks, which allows them to work with borrowers whose credit is less than perfect. Before, credit-challenged borrowers didn’t stand a chance. There are many online products where collateral or strong revenues can help offset an okay credit score.
4. Higher-Priced Loans
One important word of caution — alternative loans are going to be higher-priced than bank loans, and in some cases, the APRs can be extremely high. Ensure you completely understand the cost of a loan before committing to anything.
If you are thinking about looking for a loan online, the best advice I can give is to shop around. You want to make sure you are getting the lowest-cost loan possible and working with a lender who has your best interest at heart. Make sure the lender tells you upfront what the APR is, as well if there are any fees associated with the loan outside of interest. Be sure to read through the lender’s reviews. Trustpilot.com is a great site for online lender reviews.
If you are in need of working capital and don’t have time to wait for the banks (or can’t qualify for a bank loan), online lending is your next best step. Don’t let a bank’s “no” keep you from growth.
By Meredith Wood
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.