Most small business owners end up needing some form of financing. If you experience a cash flow shortage, you may need a small business line of credit or cash advance to cover expenses. You may be ready to expand and look for a business term loan to help you secure a new location, equipment, or other investment costs.
No matter what you need, look to outside sources for financing solutions. Traditional lenders like local banks and credit unions are popular first options. However, small business owners often cannot meet the strict borrowing requirements. They may also need to get funded faster than traditional application processes allow.
The rise of online, alternative business lenders is changing how businesses secure funds. It’s often quicker and easier, and these financing options differ from traditional bank loans and credit cards. Before you apply, here’s what you need to know to determine which one is best for your needs.
Comparing Traditional and Alternative Lenders
Business owners seek funding to help their company grow and thrive. Traditional and alternative lenders can help you accomplish this goal, and both have their own pros and cons. You can analyze their differences in four key areas:
If you want the lowest interest rate possible, banks and credit unions are the way to go. This is because they have access to a large source of capital, so they aren’t as focused on lending margins. They also have multiple sources for revenue, such as merchant services, credit cards, and business checking accounts.
Alternative lenders may have to utilize their own funds to issue loans. This could be achieved through credit facilities, banks, or investors. As a result, their borrowing costs and interest rates may be higher than what you’d find at a traditional bank.
Time for Approval
You’re in for a lengthy, time-consuming process when you apply for funding with a traditional bank or credit union. You’ll need to collect and submit your documents, and then schedule a time to go over your application in person. Once you’ve discussed your application and qualifications, it could be several weeks before you hear back. Even then, it might take longer to actually receive the funds your business needs.
Alternative lenders, on the other hand, have streamlined the application process. Everything you need can be submitted online. Approval time is faster — you could hear back in as little as 24-48 hours. Once your application is approved, your lender can get you funded in a matter of hours or days.
Fees and Costs
Bank financing comes with upfront costs, such as application and origination fees. Application fees are less common, but you’ll pay to submit regardless of the approval decision. Origination charges can be a flat cost or percentage of the amount. You may be able to shop around and find traditional lenders that charge fewer or no fees, but that’s still extra time spent away from your business.
Alternative lenders, with their online application process, typically do not charge fees. This, in a way, makes up for the higher interest rates. If your application isn’t approved, you haven’t lost any money to upfront costs.
Traditional lenders have stricter requirements and underwriting processes than alternative lenders. You’ll likely need to submit a formal business plan, show collateral, have at least two years in business, and a strong personal credit score to qualify.
For small business owners who can’t jump through all those hoops, alternative lenders make financing possible. There might be a minimum credit score, but it’s usually lower than what a bank requires. You may only need to have been in business for a year or several months.
Find the Best Lending Source
If your small business doesn’t meet the bank’s qualifications, alternative lenders may be a great option for you. However, sorting through multiple lenders and applications is a frustrating, time-consuming process.
That’s where ValueOne comes in. With a simple phone call or by filling out an online form, we can get you matched with a range of financing options that are tailored to your business needs.