Salt and pepper. Peas and carrots. Sonny and Cher. Loans and…banks, right? For most of the world, these two terms have always gone hand in hand.
But if you’ve shopped around for a business loan lately, you may have seen the term “alternative loan” floating around. And if the biggest proponents of online alternative lending have their way, this new model will soon disrupt the public’s automatic association between banks and lending.
In a nutshell, online “alternative loans” are debt-based financing products not funded by traditional banks. These lenders operate with different rules, application processes, and approval criteria than traditional banks, and they fill a significant void in the small business lending space.
So, how exactly are bank loans and alternative small business loans different? Let’s break down the most significant disparities.
As a relatively new financing industry, small business alternative lenders have been left mostly free to self-govern what loan products they offer and which customers they approve.
This is both good and bad news for small business owners. On one hand, this lack of regulation makes it much easier for small business owners to qualify for a loan from an alternative lender, especially if their credit is less than stellar. Alternative lenders get to make their own rules about who they’ll qualify and on what conditions. Banks, by contrast, are far more regulated, meaning it can be much harder for a new or struggling small business to qualify for a bank loan.
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Keep in mind, however, that the government has created regulations for the express purpose of protecting borrowers. Without these protections, borrowers in the new and unregulated market of alternative loans must be vigilant to educate themselves, think critically, and avoid loan products that don’t make sense for their financial situation.
Different Loan Products
For the most part, the bread and butter of lending for traditional banks is the traditional term loan. These come with a multi-year term and scheduled monthly payments. You’ll also find the “perfect for emergencies” line of credit, which essentially operates like a liquid credit card.
Comparatively, the alternative lending space has a wide variety of different loan products available. In addition to term loans, various alternative lenders offer short-term loans, equipment loans, merchant cash advances, invoice financing, and many more. Each of these loans come with its own terms, interest rates, application processes, and approval criteria.
Most of the time, you’ll see the term “alternative loans” associated with online lending. That’s because alternative lenders don’t have brick-and-mortar locations to meet with customers, and they primarily process applications online. This online process, along with a more streamlined approval process, means (in some cases) that borrowers can be approved in days, if not hours.
With banks, the process is typically more involved, requiring far more documentation and paperwork. That, along with an exhaustive committee review process, means it’s not uncommon for borrowers to wait weeks or even months for a loan from a traditional bank!
Is your credit score in the 700+ range? Good deal! If not, though, almost no amount of financial success in other areas will be enough to qualify you for a bank loan.
Alternative lenders, on the other hand, may still be an option. Looking beyond your credit score, they’ll give heaving consideration to your time in business, annual revenue, cash flow, and the strength of your business model. This is helpful for business owners trying to overcome a weak personal credit history to fund their businesses.
Different Approval Rates
For borrowers, the ultimate difference between banks and alternative lenders typically comes down to your ability to qualify for a loan. Not only does the process itself move more quickly, but because of the different approval criteria, many small business owners who’ve been rejected for a traditional bank loan may have better luck with an alternative lender.
Remember, however, that in the alternative lending space—just because you can qualify for a loan product doesn’t mean it’s a good choice for your business. It’s on you to make sure the alternative loan you’re taking on is a good one. Shop around, do your research, and make sure you understand the terms and repayment process for any loan before you sign. Because at the end of the day, no matter where it comes from, debt is debt. And it all has to be paid back.