If you see the news headlines it appears that banks are providing much more small business loans compared to the last several years. Reading deeper into this you’ll see how the SBA defines small business. The majority of SBA loans are to businesses with over 100 employees and the average loan is over $300,000. What happens to all those small businesses with less than 100 employees (of the 28 million small businesses, 27 million consist of 19 employees or less)? What about the small businesses that need only $5,000, $10,000, $30,000 or $75,000? Traditional banks will turn away small business owners in need of this small amount of capital 85% of the time. In business less than 3 years….you can just about forget trying to get a loan from a bank. FICO under 650…good luck! This is why the alternative business funding sector of private lenders has exploded in the last several years and continues to grow
Alternative Business Funding
There has been alternative business lenders providing capital to businesses for a while now. In the last 5 years, and especially the last 3, alternative business funding has been filling the void and providing much needed capital to those business owners who have been declined by a bank. Strong analytics, data mining, technology, and leveraging big data has allowed alternative lending companies to provide financing extremely fast. A lending decision can be provided in just 24 hours. No way your bank could do that. Required documentation is minimal. Bank statements and an application is all it will take for an approval (or a decline) within 24hrs. Making the borrowing process fast and friction-less has catapulted this industry to be viewed as a real viable option to get business working capital.
Alternative Business Funding Expectations
The process of applying and receiving business capital through this process is hassle free and fast. With that you should understand there is a price to pay. A traditional bank loan will always provide the least expensive capital. If declined, you have this alternative business funding outlet as an option. Due to the high risk nature associated with this funding process the costs of capital are much higher. Expect to pay rates as between 15% and 45% repaid over 3-18 months. The APR’s are significant. These advances are repaid daily Monday-Friday directly from your bank account. Most small business owners are taken back by the cost and repayment methods. They have to understand that this is an available option, that the lender is NOT an investor and is providing you with cash in less than a week, there is no collateral. The lenders are taking a very large risk. With speed and risk comes a higher cost. If used correctly, alternative business funding is a valuable tool. These are to be used to solve short term business problems only….until you become “bankable.”