Alternative Small Business Loans – The Importance of Transparency
Smallbusinessfunding.com wants you, the small business owner, to understand exactly what type of funding we can secure for you. We are teamed up with over 60 lenders in the Alternative Lending space who focus on providing alternative small business loans. These are private “banks” that provide alternative small business loans to those businesses that cannot secure funds through a traditional bank or do not wish to wait for a bank approval. You can use this capital for whatever reason including inventory purchases, expansion, new hires, pay taxes, training programs for employees, seasonal reasons or for general working capital needs.
Funding Vs. Loan
The capital that we help you secure is called a “funding” and not a loan by our lenders. They are not considered loans because they are advances on future revenues for a very short time frame. There is a flat fee to borrow the capital which is paid back usually in less than a year. There are some lenders though that will provide a true loan product.
Alternative Small Business Loans Repayment Terms
Repayments are debited daily, Monday through Friday, from your business bank account or through your credit card sales (accepting credit cards is not required). The amount that is debited is clearly provided on your agreement that you have with your designated lender. It will be either
A. Fixed Daily Payment-Depending on the state you are in it will be a fixed daily payment M-F. The payment will be identical and the number of payments will be clearly detailed on your agreement
B. Variable ACH Payment – This is also repaid daily M-F but will be a varied amount based on what your actual monthly revenue is. The lender will need read only access to your banking, or you send them copies of monthly statements, and will alter payments based on a percentage of actual monthly revenue. This will be between 5% and 25% and will be determined prior to funding and clearly detailed on your agreement with your lender.
C. Variable HoldBack of Processing – This is withheld from your credit card sales when you batch. This will be a variable amount also and dependent on how much in credit card sales you do each day. Usually a holdback will range from 5% to 45%. Again, dependent on numerous factors and determined directly by the lender and clearly detailed on any agreement presented to you.
All agreements will show what you are borrowing, the total amount that will be repaid (showing you the cost), the total number of payments (not an exact number as your payments can fluctuate based on your reported revenues), and the presumed time to repay (once again this can fluctuate based on revenues). But, you will not pay more than what is shown on your agreement with your lender.
These are high risk capital infusions and thus have a high cost comparable to traditional loans. Expect the cost of money to be between 20% and as high as 50% on whatever you borrow. The rate is determined by the lender only and is influenced by hundreds of factors. The lender will provide details regarding the rate on their agreement and provide ample time for you to review the agreement with legal counsel or your accountant.
Speed of Alternative Small Business Loans
Expect a lending decision in less than 48 hours. Once approved, you can receive your capital in fewer than 7 days. Average time is 3 days upon acceptance so in total from applying to receiving capital is 7 days or less.
Lenders providing alternative small business loans require much less documentation than a traditional bank. The minimum requirements include providing a completed application, most recent 3-6 months of bank statements, most recent 3-4 months of processing statements, a valid photo ID, copy of a lease or mortgage statement (if home based business), your landlords contact details, and a voided check. At times, lenders may also request a tax return or P/L statement (usually dependent on size of funding).
Funding amounts range from $2500 to $500,000. The average size of alternative small business loans is currently $40,000 but this too is dependent on many factors including revenue and cash flows. The majority of fundings are less than $20,000.
What Alternative Lenders Will Not Do:
These alternative lenders provide high risk “loans” to businesses considered high risk by bank standards in less than 7 days. They will not over extend a small business owner with payments they cannot afford. Their intent is to provide a “bridge” of capital for the short term until your business can become “bankable.” They know they are providing short term business capital for short term working capital needs. It is imperative that the business owner knows what they can afford based on their own cash flows. The alternative lenders have smart and efficient underwriting that enables them to properly determine what you can afford based on their own data.
Additional Possible Fees Associated With Alternative Small Business Loans
There can be additional fees from the lender. These are clearly detailed in your agreement. They range from underwriting or origination fees, returned payment fees, default fees, account change fees….and some others. Read your agreement carefully. Any additional fees, from our experience, are detailed within the loan agreement and require a signature so that the lender knows you acknowledged them. Some lenders have more fees than others. Small Business Funding does not charge the applicant any fee. We are paid directly by the lender only if you receive your capital. There are other companies and or private brokers that can charge a separate fee so please be aware of what you are agreeing to prior.
Alternative business lenders/banks will always run both your personal credit and business credit. While having a high personal credit score is not required, personal credit does affect your rate (or cost of borrowing). Personal credit scores below 500 may experience some difficulty in securing alternative business capital but keep in mind a lot of weight is given to your business cash flows and monthly revenues. Strong business bank accounts with solid average daily balances mean much more than a personal credit score.
It is imperative that you always make an attempt to secure capital from a traditional source first before applying for alternative small business loans. A traditional bank, friends, or family will always provide a better rate and term and ultimately will cost less than an alternative business lending product. You should use it responsibly to solve an immediate business problem or to help make your business money.