When a Traditional Business Loan Isn’t an Option, What Are Your Options?
As a small business owner, there are times that you need an infusion of cash. Sometimes business is slow and you need a bridge to get you to your next busy season. Other times the opportunity to grow your business means you need a large amount of cash, right now. Whether you have less than perfect credit or you don’t have the time to deal with the red tape of a traditional business loan, sometimes you have to look at alternative lending opportunities to meet your needs. Whether you’re looking at factoring, an asset-based loan, invoice financing or other options, here are some of the advantages and disadvantages of choosing these alternative funding methods.
Alternate Lending Advantages
There are several advantages to using private lenders with unique alternative lending solutions. First, you’re more likely to be approved. With the volatile market, some traditional banks approve as little as 20% of their business loan applicants. On the other hand, when you find the right private lender, your approval odds are as high as 95%. There’s far less paperwork involved and due diligence is often completed within days instead of months. That means the time from realizing you need cash to the time you have cash in hand can be a week or less. When you’re in a hurry or don’t meet the stringent requirements of a traditional loan, alternate lending is a fast and easy solution.
Alternate Lending Disadvantages
The ease of funding from private lenders is balanced by some pretty strong disadvantages. First, rates can be very high. If you judge it on a straight APR basis, sometimes rates are 200% or 300%. That’s because most private lenders use a factoring rate, meaning you pay back the same amount no matter how long you take out the loan. So paying it back faster actually increases your APR. Because there isn’t government oversight it’s important to look for hidden fees that can significantly affect your repayment too. These loans also have shorter terms, meaning you’ll be expected to repay the loan in full within a few months to a few years instead of 10 years or more with a traditional loan.
Much of the downside of alternate lending can be mitigated by choosing a service like factoring that also has significant savings involved. Also, shop around and find a trusted lender with fair fees. When you do your homework you’ll find a lender with all of the upside and minimal downside.