Times are tough for small business owners seeking loans from a major bank. Regulations make it harder for banks to see a profit on these loans, which diminishes their willingness to provide the funds. In fact, research suggests that up to 85% of small business loan applications are turned down by banks.
These rejections are compounded by the fact that it takes an average of 30 hours to apply for a bank loan. Entrepreneurs are extremely busy, so mountains of paperwork are quite daunting when you’re likely to end up getting a cold shoulder from the bank.
Alternative lending is a streamlined way to obtain financing
During the financial crisis of 2008, entrepreneurs found it harder than ever to get approved for loans. Alternative lending emerged as a much-needed solution, providing easier access to financing. As Forbes.com put it, “For every bank that says ‘no,’ there are alternative lenders who are eager to say ‘yes.’”
As more and more small business owners turned to marketplaces, this financing method gained traction. The US Department of the Treasury conducted an in-depth study and concluded that marketplace lending is “a fast-growing sector that is continuously evolving.”
Another study revealed that alternative lending will remain a “permanent part of the landscape.” The main reason for this staying power is that marketplaces provide access to funds for those who would often get rejected by a bank.
A wide world of options are available to you
When it comes to financing, think of banks as specialized shops that only carry a few products. While these products are of high quality, they’re only relevant to a small set of customers. Lending marketplaces, on the other hand, are like a supermarket stocked with a wide range of quality products. There’s something for everyone.
With so many options available through alternative lending, it’s essential for you to do your research—it’s not always as intuitive as you might think.
“Getting a business loan sounds simple—until you realize how many types of loans exist and how many lenders offer those loans,” explains business.org. “Suddenly, you find yourself overwhelmed by choices that you didn’t even know existed.”
Experts recommend that you start by determining your loan’s specific use. As you create a plan for the money, you’ll be able to identify the specific amount you’ll need to accomplish your goals.
While reviewing your options, you must consider several things. You’ll want to evaluate the dollar amount, interest rate, terms, and other unique elements. This assessment is how you’ll be able to pick a winner from among the many aisles of financial products in the marketplace.
Here are some of the most popular financing options offered through alternative lending:
- Short Term Loan
- Business Term Loan
- Business Line of Credit
- SBA 7(a) Loan
- SBA 504 Loan
- SBA Express Loan
- Merchant Cash Advance
- Business Credit Card
- Equipment Financing
- Commercial Mortgage
- Accounts Receivable Financing
- Startup Loan
- Business Acquisition Loan
What happens after you apply for your loan?
After doing your due diligence, you’ll be ready to choose a loan and submit your application. Lenders use a variety of factors to review your request and determine their response. Here are 6 of the most important:
Personal credit – Believe it or not, your business credit shares a lot of DNA with your personal credit. So plan on lenders wanting to study your credit history, credit in use, payment history, and amounts owed.
Personal debt usage – Approximately 80% of Americans have debt, so it’s not a big deal if you do. What’s attractive to lenders is if you have available credit you’re not using. Lenders will divide your outstanding debt by the total amount of your available revolving credit to determine the health of your situation.
Business debt usage – Lenders will want to determine whether you are carrying an appropriate amount of debt based on business size and industry. They’ll gauge this by comparing your debt to your assets and revenue.
Personal debt coverage – Because your personal and business finances are so closely related, lenders will be keenly interested in your personal debt coverage. If yours is solid, you’ll be considered a safer bet to work with.
Business debt coverage – Lenders will want to know if your business is in a position to handle all its debt obligations. They’ll evaluate your cash flow and debt payments to make this assessment.
Business revenue trend – Businesses trending upward are more appealing to lenders. If your average revenue growth over time is determined to be at or above the industry average, that’s great news for you.
Consider working with an alternative lending expert
If the boundless possibilities available through a lending marketplace sound a bit overwhelming, never fear. Many experts can help evaluate your financial situation and guide you to the best option for your needs.
The thing to remember is that, regardless of your unique situation, there’s a loan out there for you. It just takes some thoughtfulness on your part to navigate the many potential matches to find the one that’ll make your heart sing and your bottom line soar.