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Alternative, or non-bank, lending got a big boost in 2008 when the mortgage meltdown caused banks to roll up their welcome mats. In that era of recriminations, no bank wanted to go out on a limb and lend to anyone other than the most creditworthy customers. Today, businesses have learned that alternative lending, which includes commercial business loans, factoring, peer-to-peer lending and crowdfunding, can solve many problems quickly and efficiently without a lot of the delay and paperwork associated with bank loans.
Still, some business owners have negative misconceptions about alternative lending, so we’d like to clear them up:
Only bank-rejects apply to alternative lenders:
While it’s true that many businesses find it easier to qualify for a loan from an alternative source than from a bank, many owners prefer dealing with alternative lenders, as they tend to be more flexible, less judgmental and faster to respond. Many alternative lenders do not require collateral, can process an application in a few hours, and fund a loan within a day or two. One feature that IOU Financial borrowers truly appreciate is daily automatic repayment, which means a business doesn’t have to face a large monthly payment that can disrupt the business’ cash position.
You have to be desperate to seek an alternative loan:
That’s just silly. Alternative lenders would soon go out of business if they lent only to companies on their last legs. The real story is that banks turn down loans for all sorts of reasons, many having nothing to do with creditworthiness. Alternative lenders assess the risk of each loan and assign an interest rate that makes sense. Companies with less than stellar credit scores can borrow from alternative lenders when needed, such as when they have to smooth out their working capital cash flows. Any good alternative lender wants to see its borrowers succeed, not fail, and will usually work with business owners to come up with solutions with the right fit.
You can hurt your credit score by borrowing from an alternative lender:
Poppycock! There is no truth to that myth, and in fact, the opposite usually applies: If you pay back your loan responsibly, your business’ credit score should increase. Remember, business loans do not affect the individual credit scores of owners, they are strictly for business. The nice thing about getting an alternative loan is that by doing so, owners don’t have to pony up their own personal funds, which could indeed affect their credit scores.
You need high margins to make alternative loans work:
Loans from alternative lenders help all types of businesses, not just ones with high margins. IOU Financial has only four funding requirements, and none have anything to do with margins. We require that you own and operate your own business, have been in business for at least a year, make 10 or more deposits per month and have the average daily balance of $3,000 per month. Margins schmargins!
Alternative lending is unregulated:
This is a common misconception stemming from the fact that alternative lenders do not have the same capital requirements as banks. But alternative lenders are not banks, they do not offer time deposit accounts and all the other services available from banks. The business model and cost structure of alternative lenders are much different from those of banks. Nonetheless, alternative lenders must adhere to federal and state lending regulations that require truthfulness and disclosure. There is also the whole area of contract law that governs alternative loans.
The alternative lending industry is strong and vibrant because it serves the needs of many small businesses that otherwise wouldn’t be met. If you would like to discuss your own borrowing needs, call IOU Financial today for a free consultation.