For many entrepreneurs, achieving their business goals may require a little more cash than they have on hand. If business owners don't want to fundraise or borrow money from friends or family, their other option is to seek financial assistance from a lending organization such as a bank or credit bureau.
While traditional bank business loans are far from impossible to secure, new businesses often run into issues because they lack a proven financial track record.
"Many businesses do not qualify for bank financing," said Darren Schulman, chief operating officer of business financing provider AmeriMerchant. "Either their credit scores are too low, the business is new, or there is no collateral that banks would want."
Even if a business owner does qualify for a bank loan, the process may move too slowly for the ambitious entrepreneur. For this reason, alternative lenders are becoming a popular choice for startups and established businesses alike.
"Small business owners have an entrepreneurial mentality, which means when they see an opportunity, they want to move fast," said Scott Brandt, vice president of marketing at online payroll services provider SurePayroll. "So if a traditional venue for seeking capital is slow or difficult, nonbank alternative lenders are an attractive option. In most cases, what used to take weeks or months can now be done almost instantly online. "
According to a recent SurePayroll survey, 36 percent of small businesses with 10 or fewer employees plan to use an alternative lender for their financing needs. Of business owners who have already used nonbank lenders, 86 percent reported that they had a good experience and would use them again.
If you want to use an alternative lender for your financing needs, Schulman and Brandt recommended taking the following factors into consideration. [15 Creative Financing Methods for Startups]
Interest rates. The interest rates on a loan from a nonbank alternative lender tend to be significantly higher than a bank, Brandt said. It's the tradeoff for getting the loan in speedy fashion. Small business owners should know that they can pay off the loan relatively quickly to avoid hefty interest charges.
Fees and policies. While you may receive approval quickly, Schulman noted that some lenders may have disclosed upfront fees and payback policies. Be sure to speak with a representative about any fees that may apply when the loan is funded, and how the payback will affect your cash flows to make sure that you can run your business while paying back the loan.
The lender's ratings and reviews. There are many companies today who say they are an alternative lender, but Schulman advised finding a company that has an A+ rating with the Better Business Bureau. Additionally, you can research online reviews from other customers and speak with small business owners who have used that particular lender, Brandt said.
Ultimately, as with any major financial decision, it's important to look at the bigger picture and think about how this funding will fit with your long-term business plans.
"It really depends on the business and what you're trying to do," Brandt said. "Some [business owners] see an opportunity and don't think they can afford to wait. Others are willing to go a more traditional route and perhaps they feel more secure [with a bank loan]. It's really a calculation of timing and having the financial stability to pay back the loan. Moving too fast or too slow could hurt the bottom line."
Originally published on Business News Daily.