Our friends at Revitalization Partners help companies make better decisions about business operations. This blog from their newsletter looks at why alternative financing is becoming a more popular option among small and mid-sized businesses. At Juniper Capital, we are committed to sharing business advice that helps you achieve success. We offer hard money loans in Washington, Oregon, and Idaho, and real estate loans in Seattle and cities across the Pacific Northwest. Let us know what you think, so we can continue to provide you with quality information for operating your business:
The small and mid-market business lending landscape is undergoing rapid change. According to a 2014 report from Ernst & Young, “Nearly one in five small or mid-sized business reports having changed its primary bank in the past year.” The reason: access to capital. An increasing number of business owners feel that they can no longer rely on traditional lending channels to provide needed funds, regardless of a long-standing history with the bank or other provider.
And the feeling is mutual; not only are business owners departing from traditional lending approaches, but banks are losing interest in lending to smaller businesses, in favor of larger corporations with greater borrowing potential.
The lack of response from traditional lenders have opened the door for a number of alternative and private money lenders to pick up the slack. This group includes everything from “alternative lenders,” “peer to peer lenders,” “crowd funding,” and very small local banks. These lenders are meeting the needs of borrowers by meeting the demands for more flexible terms, faster access to capital, and lower amounts of paperwork.
To be clear, not all banks offer unreasonable terms meant to deter certain business; in fact, banks tend to offer much lower rates than alternative lenders. But, according to these alternative lenders, interest rates aren’t everything and more and more of these businesses are willing to absorb the much higher interest rates in exchange for certain other perks offered by alternative lenders.
One area in which alternative lenders are literally outpacing traditional banks is in how fast they can transfer funds to their customers. The top business lenders have streamlined every step of the process by shifting their platforms online. Now, rather than filling out stacks of complicated forms and paperwork, customers can answer a series of simple questions about themselves, their business, and the size of the desired loan; instead of waiting months just to see if they’ve been approved for a loan, borrowers can know within hours and receive funds within days.
According to an article from Nerd Wallet, the process of applying for a bank loan for your business can be both lengthy and complicated. “Expect to spend 25 hours or more just taking care of the necessary paperwork,” the article warns. Borrowing through an alternative lender, meanwhile, can take as little as 10 minutes.
One of the main reasons why alternative lenders can get funds to borrowers faster is because of their less stringent applicant requirements. Since the 2008 recession, banks have upped their lending restrictions so as to only approve what they consider “low-risk” borrowers. This status applies to business owners with excellent credit, whose businesses are well established and not struggling financially.
Alternative lenders have remedied this problem by offering lower requirements and more flexible terms, the tradeoff being they charge higher interest rates than traditional banks.
To receive a small business loan from a bank, you need excellent personal credit. Maintaining good credit indicates to lenders that you are a reliable borrower, that you’ll pay off your loan within the terms set by the lender. Business Finance says a credit score of 800 will get you a loan practically everywhere; 700 is considered ideal by most banks; and most banks will not approve an application for anyone with a credit score less than 640. On the other hand, alternative business lenders provide options to borrowers with personal credit scores as low as 550.
A big reason why alternative financing is becoming a more attractive option is that it often doesn’t require collateral, or an asset the borrower promises to give the lender in the event that the borrower cannot pay back the loan. There are two types of collateral a bank may require you to borrow against before you can qualify for a loan: personal collateral refers to an asset such as a home or car that can be transferred to the bank and sold; business collateral refers to assets directly associated with the business.
These loans effect your existing credit business and purchase arrangements, your business and personal collateral, and your home itself. There is no document that should be signed without your understanding every term presented. Before signing anything, consult an independent financial business advisor. It’s too important not to.
Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for their clients.
They specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.
Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, they focus on giving you the best resolution in the fastest time with the highest possible return.