While in most cases, for most small businesses seeking finance, I would advise against alternative lending, there are some instances where alternative lending can be a viable solution for small business.
Client Education
In my loan brokerage firm, we educate all of our potential clients on their financing options when considering the best source of capital for their needs. Our first priority is reviewing a client’s financials to determine if they are a good fit for an SBA-backed or traditional bank loan. These loan products come with reasonable APRs and amortization periods that give small businesses a chance to not only use the capital, but also pay it back without issue.
If a small business does not qualify for an SBA-backed loan due to poor credit, insufficient cash flow and/or lack of collateral, only then do we consider alternative lending products for their needs. In our experience, only certain types of businesses and certain types of business owners will succeed in paying back a cash advance or non-traditional bank loan without falling into a renewal cycle or irreparably harming their business.
For this reason, before suggesting a cash advance or non-traditional bank loan to a client, education is a must. It’s vastly important that a business owner has total comprehension of the repayment schedule for the borrowed money and a plan to pay the loan or advance back in full within the amortization period. Without a plan, we see many businesses get stuck in a debt cycle with little hope of breaking free.
Bridge to Bank Financing
In reality, we don’t know a lot about the alternative lending industry and the players involved – total money lent each quarter, the terms of all advances or loans, or even who all of the lenders are. Because of this, it can be difficult to distinguish a “good” alternative lender from a “bad” alternative lender.
However, from my experience in dealing with all sorts of lenders, I can honestly say that a good alternative lender is one who is cognizant of their role within the small business industry. That is to say, a good alternative lender recognizes that he or she is simply a means to an end. Alternative lenders should act as a bridge for small businesses to get them out of whatever financial hole they are in and back into a positive cash flow.
A good alternative lender provides the borrower with just enough capital needed to achieve this goal, not the max amount that the borrower qualifies for in order to increase payments and interest.
Questions To Ask
Below are some recommendations of questions to ask when seeking capital from an alternative lender to decide if they have your best interest in mind, or if they are solely focused on collecting payments. Use these questions to begin a dialogue with potential lenders.
- What percentage of clients graduate to bank financing? If this number is relatively high, it can be a good indicator that the lender is interested in helping business move into SBA-backed or traditional loans and not keeping businesses locked in the debt cycle.
- Are there prepayment penalties? Understand upfront if there will be a penalty for early prepayment of a loan balance or if you will need to pay the balance of the loan for the agreed upon length of the loan.
- What is the lien structure for the alternative lender? Blank liens on all assets of a company can make it difficult to borrow money in the future from other lenders. If possible, avoid blanket liens and seek lenders that will only take liens on specific assets.
- Does the lender offer counseling or advice? A lender that makes loan education a priority is a lender that wants to see you and your business succeed. Lenders should offer educational tools for borrowers to understand what their cash flow impact will be and a plan to repay the loan.