5 Reasons Why Non-Banks Could Be a Better Source of Funding Than Banks
For most small business owners, the conventional wisdom is that banks are the preferred source of financing anytime they are looking to expand or grow their business. That might have been true a decade ago, but banks are now facing some stiff competition from alternative non-bank lenders.
Part of this shift in market power between banks and non-banks can be traced back to the shakeup in the bank lending market that occurred during the 2008-2009 recession. Banks, for good reason, became noticeably more risk adverse. They began requiring tighter lending criteria before they would fund a loan. And they kept a watchful eye on credit scores – of both the business and the people running the business.
That drying up of credit is what gave an opening to alternative lenders such as Small Business Lending Source: https://smallbusinesslendingsource.com/business-loans. They were often willing to fund loans that risk-adverse banks were not. And they came up with more creative financing mechanisms that went beyond the plain vanilla bank loan. All told, there are five reasons why non-banks have caught up with banks as a preferred source of funding.
Reason 1: Non-banks have streamlined the application process
Non-bank lenders have figured out one of the “pain points” of small business applicants – the long, unwieldy application form that often requires a lot of personal financial information – could be replaced with an easy, pain-free application process. Since bank loans are so complex, even if you’re approved – which is no guarantee these days – it still might take as long as 60 days to get the funds in your account.
In contrast, the alternative non-bank lenders have streamlined the funding process where the time between filling out the paper work and getting the funds disbursed is often no more than 24 hours. In some cases, these applications can be completed entirely online in less than 15 minutes. All you need to provide is some general business information and some basic financial information about revenue and profitability.
Reason 2: Non-banks often do not have collateral requirements
In many cases, banks will attempt to offer “secured” credit as opposed to “unsecured” credit. You can think of this as the difference between a credit card loan (unsecured) and a car loan (secured). If you don’t pay off your car loan, the lender can seize your vehicle. In the business world, banks often require equipment or property to be posted as collateral. That means a failure to pay off a bank loan could result in parts of your business being seized by creditors.
In contrast, non-bank lenders usually do not require collateral. In exchange, they usually charge a slightly higher interest rate to compensate them for the additional risk. But it also means that you’re not pledging assets from your business just to get a loan!
Reason 3: Non-banks typically do not consider personal credit scores
Credit scores are used for a lot more than just determining whether or not you qualify for a new credit card. Many bank lenders, for example, often use your personal credit score as another factor to consider when making a business loan. You can immediately see why this is a non-starter for many small businesses, especially given the fact that nearly one-half of Americans have subprime credit scores these days.
What matters for non-bank lenders is not your personal credit score, but rather, how your business actually makes money. Whether your business has a clear source of recurring revenue is a lot more important than your personal credit history. That’s because cash flow from operations is what will pay off your loan, not an abstract number.
Reason 4: Non-banks are more willing to fund new, startup businesses
Many banks prefer to fund established businesses – the kinds of businesses that probably don’t need funding in the first place. Banks like to see a long track record of success, backed up by pristine financial statements. That makes them much more unlikely to lend to new, startup businesses. There’s simply no track record of success and most startups can take 12 months or even longer before they become profitable.
In contrast, non-banks are much more willing to consider the overall financial context. They recognize that past history is no guarantee of future performance. And they also want to see what your business model is like. If you can show that you have a profitable business model, then that is just as important as showing that you had years of profitability in the past.
Reason 5: Non-banks offer more flexibility on how you use the funding
When you get a bank loan, you are usually limited in how you can use the funding. In many ways, that makes sense. If you are getting an equipment loan, banks want to make sure that you are using the money for equipment. If you are getting a loan to expand inventory, banks want to make sure that you are purchasing new inventory with that money.
But non-bans are much more flexible in how you use the new financing. They recognize that all businesses have short-term and intermediate-term cash flow needs created for all sorts of reasons. In some cases, you need funding to upgrade your equipment, but in other cases, you need the funding just to meet payroll and cover unexpected expenses.
As you can see, alternative non-bank lenders such as Small Business Lending Source have really helped to level the playing field for small businesses. These financial institutions still use the same risk/reward framework as banks to determine whether or not you qualify for new financing, but they are often willing to take a much more flexible approach than traditional bank lenders.
That being said, always practice due diligence before accepting a financing offer. There are a lot of alternative lenders out there these days. It’s best if your lender has experience in your industry or sector, or some other expertise that can help you grow your business. View them as a financial partner, and not just as a source of funds. By doing so, you’ll make the right decision on how to fund the next stage of growth for your small business.