Traditional banks have been the stalwart of lending for a long time. The stigma of small time lenders has always lead to the reputation of a big bank being the default for loans. But with increased competition comes bigger rewards and savings for the little guys, and people are finding themselves saving a lot by trying out alternative lenders when traditional lenders fail to offer good deals.
The typical scenario is a small business looking to open a line of credit, and having trouble getting help from a bank. So do you turn to alternative lenders? Or try to work with the banks?
Traditional lenders are traditional for a reason. You know what you’re getting, you’re getting security and a lower rate, but usually a lot less flexibility. If you don’t fall into one bank’s category as a safe bet, you probably won’t fit into most traditional lenders’ criteria as a suitable candidate.
Traditional loans are usually the best bet, but if you’re having trouble, getting an alternative lender can be a good idea while you build up your credit score. Further down the track a traditional lender might be a good idea once they’re feeling more confident about your ability to pay back the loan.
Alternative lenders are typically sought if a traditional lender doesn’t like you. Whether it be your collateral or your lending history, alternative lenders can be a lot more flexible – usually at a premium. You’ll pay a higher rate to secure a loan you wouldn’t otherwise get at a traditional lender, such as at a bank.
Another big advantage to alternative lenders, is usually you can secure the funds in a much shorter time frame. If you need the money urgently, for example to pay salaries for a small business, alternative lenders are the way to go.
If you’ve got a small business, chances are you haven’t had a chance to build up a good credit history, yet. Small lenders will overlook this far more readily than banks will, but again, you’ll have to pay for the privilege.
Long story short, risk averse bankers have been unwilling to stick out their necks for small business for a long time, and have been unwilling to change.
Alternative lenders have filled the niche and offer far more competitive features and flexibility, for the increased rates that are needed when they don’t have a bank backing them (and their clients are a bigger financial risk).
Maybe the lure of a multi-billion dollar pool of potential customers will lure big banks out of their shell and start taking bigger risks on smaller businesses, but at the moment, if you’re a small business, alternative lenders might be the way to go.