Alternative Lending and Bank Lending: Advantages And Disadvantages

In the past, small business owners had one choice for a loan – their local bank. Today, you will find hundreds of online alternative lenders that facilitate fast loans for small business owners. Here are advantages and disadvantages of dealing with an alternate lender or a traditional bank.

What is alternative lending?

Alternative lending is the procedure of providing loans outside of traditional routes. Alternative lenders can provide more flexible loan options, giving more and more people the chance to qualify for a business loan.

Types of alternative lending products

New technology platforms, alternative lenders, an internet-based marketplaces each try to make capital more accessible. Following these technological advancements, online lending started to grow as a supply of funding for smaller businesses. In 2020, for instance, 24% of firms applied for funding directly from online lenders. Because they became more popular, three financing products emerged:

Merchant Cash Advances

A merchant cash loan (MCA) could be a quick fix for small business owners. MCAs can be a fit for individuals who need short-term financial assistance and have been denied a traditional bank loan because of poor credit scores or weak business financials. However, payday loans will set you back a bundle. Before you consider trying to get one, make sure you do your research. The SmartBiz Blog has in-depth articles about this option:

  • Merchant Payday loans – Outlines more details concerning the application and costs.
  • What Your company Must Know About MCAs – Weighs the benefit of cash advance loans with the high interest rates and hefty fees.

Peer-to-Peer Lending

Peer-to-peer lending came onto the scene when the Great Recession of 2008 and 2009 managed to get extremely difficult for smaller businesses to obtain loans from banks. Recognizing a necessity, online marketplaces were founded that connect businesses with individuals who have money to lend. However, caution. Evaluate the reasons outlined below to reconsider this funding option: 4 Reasons Smaller businesses Should Avoid Peer-to-Peer Lending.

Online Marketplaces

Marketplaces offer lots of educational content to educate borrowers on funding options that they're entitled to. They can't extend direct financing, so small businesses might find themselves trying to get a pricey lending product.

Alternative lender advantages

These are the major benefits:

  • Simpler qualification process: Non-bank lenders may use different information than the usual bank requires to assess creditworthiness. Some check this out process as easier, fairer, and much more balanced.
  • Funding options: It's a fact: major banks tend not to make use of loans they consider too small. That is because they do exactly the same amount of work to fund these loans and don't make as much as they are doing off of larger loans. The right non-bank lender has funding options customized for small businesses.
  • Quicker approvals: You do not need an extended, drawn-out approval process as a startup founder. Being an entrepreneur, you must get going quickly, so choosing an alternate lender is ideal.

Alternative lender disadvantages

Consider these disadvantages before you begin dealing with an alternate lender.

  • More expensive: Because alternative lending is used by small business with no extensive background, they represent a greater risk. As a result, non-bank-lenders may charge higher interest rates or a shorter-term, leading to large payments that may reduce your money flow.
  • Smaller loan amounts: Alternative lending platforms lessen their risk by offering smaller loan amounts. Most vary from $1,000 – $50,000, most abundant in common loan in 2020 averaging $13,000. However, for those who have a good credit rating, loan amounts could be higher.
  • Shorter terms: Lenders mitigate risk by shortening the repayment period. What this means is smaller businesses might end up accessing funds for any shorter period of time, which can impact their funds flow once the loan expires. For those who have a powerful credit rating, you may be able to negotiate longer terms resulting in shorter payments.
  • More frequent payments: While traditional loans from banks typically require monthly obligations, some alternative lending solutions require daily or weekly repayments.
  • You may only be able to get a sizable loan: Some non-bank lenders might be hesitant to sign off on

  • Non-bank lenders might have to go out of business: Since they're relatively recent, there is a chance lender you train with could go bankrupt. How would that affect your business operations? When choosing to work with a non-bank lender, take a look at them how you might evaluate every other business before you decide to have confidence in them and transact together. Investigate if they have been running a business for at least a couple of years. Determine if they are well-funded and also have the support staff ready to answer questions and guide you with the application. An execllent way to get a pulse with an alternative lender would be to read reviews from real customers. Google reviews, TrustPilot, and ConsumerReports are great sources of information.
  • You may not have any discount if you repay the loan early: Inquire about repayment penalties or fees. You might be planning to repay the loan early and you don't want to be penalized.
  • Some non-bank lenders may charge hidden fees: It's vital for a small company borrower to see the small print. Also important is to have good customer service to get clear solutions to any queries. Some alternative lenders will add disbursement fees, origination fees, repayment fees, and more. It's recommended to utilize your bookkeeper or accountant to determine the loan amount and cost you heard right for your unique business.

What is a bank loan?

A small company financial loan happens when a bank offers to lend money to a business for any certain period of time. The borrower pays some interest for that life of the loan.

Advantages of the bank loan

  • Low interest rates: Generally, loans from banks possess the lowest cost interest rates than alternative lenders.
  • Flexibility: When you receive a financial loan, you won't have stipulations about how you can spend the money. Whether you need capital to buy new equipment, enter a brand new market, or do a new marketing plan, you can use funds from the bank loan.
  • Maintain control: You don't have to give up any equity to obtain a loan from a bank.
  • Interest is tax deductible: The eye on business bank loans is tax-deductible. In addition, particularly with fixed-rate loans, in which the rate of interest does not change throughout a loan, loan servicing software payments stay the same throughout the lifetime of the loan. This makes it easy for businesses to plan for payments. Even if the loan is definitely an adjustable-rate loan, business owners may use a spreadsheet to compute future payments if rates go up or down. For more detailed information about deducting interest on business loans and other info on business deductions, see IRS Publication 535.

Disadvantages of the Bank Loan

  • Requires profitability: While venture capitalists and private investors usually take risks to invest in companies that have not yet become profitable, banks won't take that risk. To be eligible, your organization should be consistently profitable, which disqualifies the majority of startups.
  • Complicated: Receiving a financial loan can be time intensive if you don't have your financials so as.
  • Speed: The procedure with a bank could be slow. It often takes several months to qualify and acquire capital from the bank. When compared with other financing options, bank loans serve as one of the most difficult to obtain.
  • Collateral: No matter profitability, time in business, or how good your credit rating happens to be, banks will need some type of collateral. Banks have to protect themselves in the case that you cannot payout your loan. More details from SmartBiz University here: Reviewing Collateral Requirements.

Funding options through SmartBiz Loans

SmartBiz Loans is not a bank or an alternative lender. SmartBiz may be the leading online bank network for SBA loans and assists smaller businesses to apply for these loans through its network of preferred SBA lending banks. Approval rates are increased by matching smaller businesses with the bank most likely to state “yes” for their loan. SmartBiz offers the “gold standard” in small business lending, SBA loans. Bank term loans and much more financing choices are available too. Find out more on the SmartBiz Loans website:

  • SBA 7(a) loans
  • Bank Term loans
  • More financing

SmartBiz has an online application with an easy-to-use dashboard. Additionally, small business finance experts are on hand to answer any questions and provide assistance. If you're prepared to apply, start a credit card applicatoin and find out if you are prequalified in about 5 minutes.