How to Choose an Alternative Business Loan
If your small business is like most, you operate on a very tight budget and may need additional funds in order to take advantage of an opportunity that helps your business grow. If your business is a startup or doesn't quite meet the bank's requirements for a conventional loan, a small business loan from an alternative lender may be a viable solution for your funding needs.
However, if your credit is good, you have time to apply and wait for a small business loan, the SBA 7(a), can give you better interest rates and longer repayment terms. If you intend to use your loan to purchase real estate or long-term-use equipment, an SBA commercial loan, in conjunction with an SBA CDC loan can provide you with 90% of the financing required for the project and the lowest interest rates. If you need startup business loans or less than $50,000, SBA microloans or alternative microloans are practical options to consider.
Is an Alternative Business Loan Right for You?
Alternative business loans are generally smaller than conventional bank loans, with available amounts starting as low as $2,000 and maximum amounts of up to $500,000. Terms are shorter, ranging from one month up to five years. Interest rates are higher than conventional loans, with the best interest rates averaging from 6% to 25%, like Lending Club, whose rates start at 5.9%. However, some alternative lenders may charge much, much higher rates, since alternative lenders aren't subject to the same regulations as banks.
The biggest benefit of alternative loans is that lenders are eager to lend to small businesses, even those that haven't been in business for a long time or that have less-than-perfect credit. Because of this, alternative loans are easier to apply for than conventional loans, with shorter, less paperwork-intensive applications; most are online and can be completed in under an hour. For example, OnDeck estimates that its application can be completed in as few as 10 minutes. Alternative lenders approve applications quickly, sometimes instantly and usually within a few days, and you can often receive your alternative business financing within a week. Another advantage of alternative business loans is that most can be used for any business-related purpose, from working capital to inventory to equipment purchase. Some, such as Kabbage, allow you to draw from the approved loan amount on an as-needed basis, which enables you to use the loan as a business line of credit. The disadvantage of alternative business lending is that it's more expensive than bank loans.
Alternative Business Loans: What Should You Look For?
Before you accept any loan offer, it's important to read the entire contract and ensure that you understand exactly what interest rates, fees, costs and penalties you can expect and that you know exactly how much the loan costs in total, as well as upfront expenditures and daily or monthly payments. You want to be ensure that you understand your obligations and repayment responsibilities, and that you have the means to repay the loan in full and on time.
The dollar amounts available to you varies from lender to lender, with the smallest alternative loans starting at $2,000, and the largest as high as $500,000, although most offer up to $150,000. However, the amount that lenders are willing to extend may depend on your business's health, which they evaluate using several factors, including your cash flow and your business and personal credit history.
Interest rates are higher than you would expect to pay for a conventional loan, and may be expressed as a flat fee instead of a percentage-based interest rate, which can make it confusing to compare against other loan options. Loans with terms of less than a year can also make it difficult to see the actual APR. You can find online calculators that can help you convert the fees and rates to an APR, which gives you a consistent number to use for apples-to-apples comparisons. Be aware that the alternative lenders are not subject to the same regulation as banks and interest rates for some alternative loans may be exorbitant.
Most loans include an origination fee of up to 5% of your loan, although most average around 3%. Lenders may also charge an underwriting fee or a maintenance fee. Because fees vary from lender to lender, it's important to read your contract. If the fees you are quoted differ from the fees in the contract, you want to ensure that the lender updates the contract to reflect the quote they gave you before you accept the loan.
Alternative business loans have much shorter terms than conventional loans. Most offer options of less than a year, with the shortest having a term of just a month and the longest with repayment terms up to five years. The average repayment term is between 12 and 24 months.
If your small business needs a loan in order to take advantage of a time-sensitive opportunity, or if you don't quite qualify for a conventional loan and need an influx of funds to help your company grow, an alternative business loan can be worth considering. There are many alternative lenders available and they're eager to lend to small businesses, so it's well worth your time to shop around and compare your options in order to find the loan with the best rates, the lowest fees and reasonable repayment terms.
Disclaimer: The interest rates listed are reflective of the date this review was last updated.