Up until 2009, when business owners needed an influx of cash to expand, buy equipment, or even just take care of their daily needs, they went to the local bank. Then the financial industry bottomed out, and banks grew very wary of giving out any type of loan. This paved the way for fast alternative business lenders to step in and save business owners from bottoming out too.
Despite being a viable solution to a business’ cash flow problems, there are still those who struggle with the cost of an alternative business loan compared to one offered by banks. Yet, when you consider the type of product an alternative business loan is, and the way in which most are obtained, you will have a better understanding of why it may be worth getting what you pay for.
The Risk of a Fast Business Financing Loan
Fast alternative business lenders rightfully charge more because they are taking on more of a risk than a bank is willing to. Typically, there is no regard for your credit history and no collateral required, which of course makes it a better option for you, and a risky undertaking for the alternative business capital lender. In order to cover their potential for loss, they need to charge higher rates than what you may be used to with a bank.
This is still a fairly new industry, and the risk potential has not yet been as clearly defined as it is for banks. As new information and statistics become available, and systems improve for evaluating risk, alternative lenders should one day be able to drop their costs for business owners of good standing in the same way that banks used to. Keep in mind, however, that for that extra price you may pay now you are getting a loan approval quickly, rather than having to wait months with a bank, still with the probability that your application will be declined.
The Convenience of Fast Alternative Business Lenders for Business Loans
The second reason why an alternative business loan is priced higher is that they are more convenient, and you should always expect to pay more for convenience. Business owners don’t always have the luxury of waiting months, or even weeks, for working capital. With no credit checks (in some cases) and no need to offer collateral, alternative lenders are sometimes able to offer cash to the business owner in just a few days. You will never find that type of speed with a bank loan, but it does come at a price.
There is also the convenience of being able to apply for the alternative business loan from your desk. A large number of alternative lenders operate online, accepting, reviewing and approving your application without you ever having to leave the office. For the busy business owner, not having to make multiple appointments with a loan officer is invaluable. By being able to stay where you are needed and only take a short time to apply for your alternative loan, your business doesn’t suffer from your absence.
The Terms of an Alternative Business Loan
Because of the risk involved, the terms for business loans from an alternative lender are much shorter than your typical bank loan. That makes for larger principal payments combined with a higher rate of interest. These types of loans are structured this way to help limit the risk of default, but will give the borrower the impression that they are paying much more overall for the loan. While you may be paying higher interest rates (or cost of capital if a merchant cash advance), having them spread out over shorter terms will actually close the gap slightly on the price difference between an alternative loan and a bank business loan.
Advertising for Alternative Business Loans
Unlike big banks, brand recognition can be used to your advantage, fast alternative lending companies must rely heavily on advertising in order to make the availability of their services and products known to business owners. These costs can run high for them, and will be reflected in the rates and fees that are charged to you. Of course, this is not an expense that has any impact on your business or even your need for working capital, but it is one of the costs of doing business that will end up being absorbed by you when accept the terms for an alternative business loan.
What About a Small Business Administration (SBA) Loan?
The SBA has a number of services available to help small businesses, including access to loans. While this may seem like a good option to bypassing the bank, you should know that the SBA only acts as an intermediary and is not actually the lender. They work with the same financial institutions as you would be, assisting you in filling out the application and submitting it. Yet, that application is going to the big banks who still expect you to meet their strict criteria for a loan approval, even though you have SBA support. The process is long and often does not end in a positive result for the business owner.
When it comes to adding funding to your business in order to keep the profits flowing, it is not always about the best price. Fast alternative business lenders are there when you need them the most, making any added cost worth it to the savvy business owner who is thinking about their bottom line. If you take some time to find an alternative lender who provides multiple options and lower costs than the others, the extra price you pay could be paid back to you in the long run through increased sales and a more stable business structure.