Business owners use small business loans to boost cash flow, buy expensive machinery, and grow their enterprises. Business loans are usually a good option since they are cheaper than getting a credit card and do not require giving up a part of the company to investors. Alternative lenders are essential for startups that may not be qualified for a traditional bank loan. Here is a guide that should help you gain a deeper insight into the loan market and select an alternative lender to finance your business.
Why Is a Business Loan Important?
There are many benefits of taking a business loan, including:
- Short-term cash flow boost
- You maintain control of your company
- Fast funding
- Lower interest rates compared to credit cards
Types of Lenders
Small Business Administration (SBA)
The SBA has numerous loan programs designed to meet the monetary needs of various types of businesses. Here, the government is not directly offering funds to small enterprises. The SBA sets rules for the loans given out by its partners, including microlending institutions and banks.
Some of the benefits of SBA loans include:
- The governmental guarantee (usually 75% to 90% of the loan amount) reduces the lenders’ risk.
- SBA loans have favorable terms
Some cons include:
- Extra paperwork is required
- Extra fees must be paid
- Approval takes longer
An alternative lender is an attractive option for small businesses since approval requirements are relatively lenient. Alternative lenders usually offer online applications, approve applicants in hours, and dispatch funding in at most five days.
Direct alternative lenders give funds to small enterprises directly, whereas lending marketplaces provide a platform where small enterprises and alternative lenders can meet.
The pros of working with alternative lenders include:
- Ideal for small businesses that may have a spotty financial record
- There are fewer restrictions placed on the funds
- Loans are approved quicker
The major con is that alternative lenders charge a higher interest rate than banks.
If you are considering applying for a loan from an alternative lender, take the following into account:
- The interest rate
- Their policies and fees
- The lender’s review and ratings (their rating with the Better Business Bureau should be an A+)
Traditional Bank Loans
The main benefit of traditional bank loans is that they have lower interest rates, and the approval process is quicker because the government is not involved. However, bank loans often have a shorter repayment time compared to SBA loans.
Whether you choose an SBA loan, an alternative lender or a bank loan will depend on your situation. Ensure you conduct proper research before landing on one of these three options.