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What is an Alternative Lender and How Do SMB’s Choose the Right One?

It’s not news that larger banks often underserve small business funding needs. The financial gap left behind for small businesses affects the ability to take advantage of growth opportunities, get over a slump, cover unforeseen costs or expand their business. According to our recent survey, many owners aren’t familiar with alternative lending. In fact, only 12 percent of SMB’s have used it, and another 39 percent said they’ve never heard of it. It’s important for us to share information with potential clients on how the application and funding process differs from the traditional bank route.

Daily, we educate those business owners who call in with preconceived notions of how the funding process works. Small business funding or alternative lending, is not like borrowing from a bank. We’ve outlined some common misconceptions about the industry, as well as red flags to consider when looking for the right fit for your small business funding needs.

Misconception #1 – Terms and conditions are the same as banks

When clients consider alternative lending, they still think they are dealing with long-term commitments.

Reality: Alternative lending is typically structured to get you all the way through the repayment process in a mere 3 to 15 months.

Misconception #2 – Assets/collateral are needed

Callers think that when they apply for funds, it’s asset-based. They dread having to pledge an asset to get the funds they need.

Reality:  Very few alternative lenders collateralize with hard assets. It works to the benefit of the business owner because we don’t hold the assets, unlike traditional banks.

Misconception #3 – It’s a long application process requiring tons of paperwork

Many potential clients believe we need just as much information as the banks do to apply for funds, and that it will take just as much time to approve and dispense the funds (typically weeks or months).

Reality: The application process is minimal in both time and paperwork. We typically require six-monthly business bank statements, one year of a business tax return, and a one-page application. Distribution of funds takes a matter of hours.  Plus, our clients experience an approval rate of roughly 70%. Banks approve less than 30% of business loan applications.

Misconception #4 – Subsequent funding

When clients borrow from a bank a second time, they may need to complete another lengthy loan process again.

Reality: Reliant’s clients not only have a short process for subsequent funding but those in good standing can usually access more funds over longer terms once they’re past the midway point of their original program.

Misconception #5 – Having bad credit won’t get you approved

Many assume that their low credit standing will affect eligibility for approval.

Reality: Don’t be afraid to apply. While banks place a strong emphasis on credit score, it’s only one of many factors considered by alternative funders. Your company’s ability to repay funds and general business stability is also important.

Misconception #6 – There is an early payoff penalty

When borrowing from a bank, there is usually a minimum of a 3-5-year loan term length. This time frame forces the borrower to hold the loan open with no early pay off options without penalty. We address this misconception every day when speaking with potential clients.

Reality: When it comes to alternative lenders, there is never a penalty for paying off early.

Misconception #7 – There are always personal guarantees

Many banks require a personal guarantee of collateral or property for them to give you funding. It’s a common question our funding specialists hear often.

Reality: This is unique to each company. For example, at Reliant Funding, our in-house program does not require a personal guarantee. Other vendors, or if we work with an outside source, may be different. Just make sure you know all the details upfront.

Choosing an Alternative Lender

Not all funding is created equal. Each company has its way of conducting business, and those looking for funds should carefully evaluate their options. Here are some definitive red flags to look for:

Red Flag #1– No physical address

If you are working with an alternative lender, always ask for their physical address upfront. There are many online lenders in the small business financing space, but they should always have a legitimate address that isn’t a P.O. Box. If the lender cannot provide you with one, you should suspect how credible they are.

Red Flag #2 – You’ve been pre-approved!

We pre-qualify businesses, based on the publicly available information. That encourages the owner to talk with us. A pre-approval before you’ve even applied or submitted paperwork is a huge red flag. A legitimate company will require a completed application, review your financials and verify your identity before making a decision. They will then work with you to create a customized program that suits your needs.

Red Flag #3 – Charging upfront for application fees

There are business loan “brokers” who scam business owners into paying for services such as an application fee. The popular con is for a broker to ask for an upfront processing fee that can be as high as $3,000. If you pay this fee, you may never hear from them again. Your personal information can be at risk as well in these situations. The bottom line is: if you are dealing with a respectable company, there should be no cost to apply and no obligation to accept any offer.

Red Flag #4 – Lack of transparency about loan terms

Some companies commonly offer loans with confusing or misleading pricing information. Any reputable lender will make a point of highlighting the rates, terms, and fees before you commit. You want to do business with a company that’s completely open regarding the total cost of the funding package.

If you have any questions about how our application and funding process works, we are always here to answer any questions and help with your small business funding needs.

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