Pros and Cons of Alternative Commercial Financing
Most businesses need access to financing at some point in their life cycle. However, traditional bank loans are not always the best option. Although you may want to research traditional funding first, because you may receive lower interest rates and longer repayment periods, if you cannot get approved, you should know the pros and cons of alternative financing.
First, you should be aware of the disadvantages of this type of financing. First, you will typically pay a higher interest rate than you would if you had a conventional bank loan. In fact, you will rarely pay a rate lower than 10%, and your rate will most often be in the mid-teens at least. If your credit is especially poor and you don’t have the collateral to back the loan, you may be seeing an APR of 100% of the loan value.
In addition to higher rates, you may pay higher fees. Therefore, ask for a fee schedule before you sign any paperwork. In addition, alternative funding sources often have shorter loan periods. This is great if you expect to make the money back quickly. For example, you may need a short-term loan to purchase the raw materials to manufacture a big order in six months. When you receive the payment from the order, you can then pay the lender in full. However, if you need to invest in machinery, alternative lenders will rarely give you more than two years to pay back the loan.
Alternative lenders offer rapid approval, underwriting and fund distribution. Whereas you may wait months for a bank to complete the loan, you may receive your alternative financing in just a few weeks. These lenders also have a much higher approval rating. Banks typically approve less than 50% of the loan applications they receive. However, nontraditional lenders typically approve up to 95% of their loan applications. This is a significant difference. Therefore, if you don’t have the credit or assets necessary to gain approval from a bank, an alternative lender may be able to better serve your needs.
Nontraditional financing also requires less paperwork and preparation. With alternative financiers, you may only need to provide your bank statements and a credit application. However, you may have to give them your tax returns and a profit and loss statement as well. Traditional lenders often require much more paperwork, including both your business and personal financial statements, debt schedules, list of assets and three years of tax returns.
If you need short-term financing and cannot get approval from a traditional lender, consider the pros and cons of alternative financing.