by Daniel Wesley
For small business owners and entrepreneurs, trying to secure a loan from a traditional bank can be a long, discouraging process. Although lending rates are up from their post-recession low, big banks still approve only about a fifth of small business loans.
For small businesses with a checkered credit history and startups with no credit record, alternative lending has become an increasingly attractive and necessary choice. Lending Club, a peer-to-peer lending company, and OnDeck, a lending service focused on small businesses, are seeking to modernize the lending process.
While banks have strict lending criteria, alternative lenders are often willing to look beyond traditional credit requirements and consider real estate holdings, invoices that show expected income, and even positive online reviews to grant a loan. As opposed to the 30 to 60 days banks usually take to approve a loan, alternative lenders will approve a loan within days or hours.
These options are invaluable for businesses that need capital fast, but convenience can be costly. Some alternative lenders look to business assets to secure a loan, which can be problematic if the lender seeks to claim those assets. After all, a small business’s assets and inventory are often what allow it to make money.
Another complaint is the high interest rates alternative lenders can charge. Startups that don’t have a credit history are usually stuck with a higher interest rate because it’s impossible to judge the probability of loan repayment.
But if you’re considering pursuing a loan through an alternative lender, it’s possible to lower your interest rate by doing your homework and being prepared.
Here are a few tips for securing the capital your business needs at a manageable rate:
1. Consider a personal loan.
If your business is less than two years old and doesn’t have an established credit or tax history, you may want to leverage your personal FICO score and take out the loan in your name. This makes you liable for repaying it, but it could save you money if you have good personal credit.
2. Keep meticulous records.
If you decide to apply for a business loan, you’ll want to show at least two years of your company’s financial history, including tax returns that show profits.
3. Monitor your online reputation.
Make sure you have a high rating on social media and business ratings sites, and address any negative reviews that could affect your image. For instance, lenders may approve a small business with high Yelp ratings because its popularity suggests that the company will be able to repay the loan.
4. Research lenders and options.
Researching different firms and standard alternative lending practices helps you avoid getting taken advantage of or missing out on better borrowing opportunities.
Ask your peers for feedback on different lenders, and find out if there’s a particular firm that specializes in your industry. Look for testimonials or feedback on the company, find out the typical interest rates and risk assessments, and make sure you understand the terms of your loan.
5. Don’t wait until the last minute.
If you think you might need a loan in the next month or two, start researching your options now. You want to act quickly but intelligently and apply for the loan as soon as possible. The more control you have over the outcome of the process, the less likely you are to take on a loan that doesn’t have the best interest rate or repayment terms.
Alternative lending provides access to funding that could save your business or give you the capital you need to grow. As a borrower, the same rules apply as in traditional banking: Be smart, know whom you’re borrowing from, and protect yourself from exploitative rates.
Daniel Wesley founded DebtConsolidation.com to help consumers become debt-free.
Photo Credits
Courtesy of Daniel Wesley | Giuliano Maiolini
