Traditional vs. alternative lending – what’s right for your small business

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.

brokers

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

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

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.

Loans for Start-ups

You have a great idea, everything is ready to go big, you just need the money to realise your goals. You’re worried about investors taking control of your company, but you have no other way to get the funds you need.

Banks are increasingly becoming better options, as they are becoming more open to the idea of startups and their potential versus the risks. Startup loans are considered a lot like personal loans – banks will hedge their bets based on the risk of them giving you money.

So what are the options with banks and what will they want to see from you?

Assets

If you have assets under your name, it will make the application process a lot easier.  A house or property will almost surely secure you a loan in at least some form.  Even vehicles can be considered and everything adds up.

Income record

It sounds cliche, but having a clean, consistent income record will do wonders for bank’s confidence that you’re responsible and will be able to pay off the loan.

Financial Plans

Budget where the potential loan will go.  If you can show the bank exactly how you intend to distribute the loan, it will give them a lot of confidence that you actually know what you’re doing.  Confidence is the key, as banks don’t want to think that you’re just planning it on the fly. They’ll want to know exactly how you plan on paying back the loan.

Credit Score

The age old conundrum. You need a good credit score to get a loan, but you need a loan to build up credit score. Consider getting some small loans to start building your credit score before you want the big push for big growth.

Bonuses

Banks are facing increasing competition from smaller and more niche lenders, so banks have been looking to add extra benefits to encourage entrepreneurs. These can include free banking for an introductory period, or personalised business tips.

Business Tips

The banks want you to be able to pay back your loan, and have financial experts more than willing to help you reach your financial and loan goals. Good business for you is good business for them. If you successfully pay back your loan and are happy with them, they realise you’re more likely to look to them for financial help in the future.

At the end of the day, you need to explore all your options. Banks have the experience and will try to entice you, but there are also smaller lenders that are more niche and may serve your interests better. The experts at EasyPlan have access to a lot of information to compare loans that you may not have even considered. Hidden costs, clause agreements – these can all come back to bite you if you haven’t thoroughly researched the lender or haven’t worked with them in the past. Using the experts can definitely save you hassle, and may save you a lot in the long term, as they know all the ins and outs to make sure you don’t end up paying a lot more than you bargained for.