Lenders: Alternative vs. Traditional

Technology has changed a lot in the past few years and one that this has affected is how we do funding.

Traditionally, small businesses have always turned to banks or credit unions for financing and opting for a more traditional process is still popular in some regions, don't get me wrong, but due to a new breed of business owners and their needs for a quicker and easier process, alternative lenders have come into the picture.

Now you make think "So, which one is better?". To help you decide better on which fits you best, here are some things to compare between the two options.

Interest rates

Banks are known to offer lower interest rates versus alternative lenders. This is somewhat because banks have access to a larger capital and they have other sources of money which mean they don't have to be as focused on the lending compared to alternative lenders, who instead may have drawn funds from credit facilities or investors to issue loans that cause for their interest rates to be higher.

Other costs and fees

After checking the rates, let's look into the other costs and fees you might encounter. Of course, just making sure there are no hidden fees! Some of the common fees you may encounter are: applications fees(regardless of the decision), origination fees, late fees, prepayment fees, documentation fee, etc. Not all lenders charge these, so it is best to check which ones does and which ones who don't.

Timeframe

As most of us are aware by now, working with a bank can be a lengthy process especially when documents or requirements are involved. With banks, you may also need to schedule phones calls or go to a branch just so you can discuss the applications process. That doesn't include the wait just to hear back from the bank for updates. Unlike banks, alternative lenders made the process convenient for potential customers. That means you can apply, send your documents online and get feedback within 24-48 hours. Most if not all alternative lenders even send the approved funds to your account automatically.

Qualifications

Now that you have an idea who you think fits your business funding needs, see where your business actually qualify with. Requirements vary per lender, banks usually are stricter with requirements compared to alternative lenders who often cater to a wider variety of business owners.

For example, there tends to be a minimum credit score required but it’s often lower alternative lenders than the bank’s requirement. Business tenure is also a common requirement, alternative lenders require you to have been in business for about half a year while banks often require a minimum of two years. Banks may even ask for your personal credit score, a business plan and collateral to qualify.

Conclusion

But at the end of the day, what's best for you and your business will still depend on you and your business. Loans are not a one size fits all kind of a situation. That being said, I hope this helped you evaluate better who to go with!