Bank Loans Versus Alternative Financing
Major corporations, entrepreneurs, and small businesses all have one thing in common: They need financing. An established business finances itself, but getting to the point where the venture is turning a profit takes time. Many run into rough patches where they need extra cash to stay afloat. These are times when it’s important to know the difference between bank loans and alternative financing.
Chances of Approval
According to Forbes magazine, the primary reason people seek out alternative options to their lending needs is because they will not be approved by a traditional banking institution. Even with good credit, banks are notoriously picky about whom they lend money. The chance of loan approval is far greater with an alternative financing source, because these lenders are willing to work with the person.
Both types of loans have an application process, but the bank will require more paperwork and take more time in coming to its final decision. For a bank loan, the applicant must fill out the application form and provide financial statements, both business and personal. They must also provide proof that they have collateral to back up the loan.
The bank will present the paperwork to its loan committee, which could take weeks to come to a decision. An alternative funding application can be filled out online and generally asks for less information. The decision will be made quickly, likely in the same day, and the lender will issue the approved funds within 24 to 48 hours.
Traditional banking institutions have a minimum they are willing to endorse for business loans, which might be anywhere from $200,000 to $1 million. Alternative funding is more flexible. If a small business owner only needs $1,000, the alternative lender will be willing to provide the lesser amount. This benefits both parties, as the lender takes on less risk, and the business owner takes on less debt.
The most important thing a person should consider when taking out a loan is his or her ability to pay it back. Overdue loan payments negatively affect credit and may preclude the business owner from future vendor and financing opportunities. Big banks are inflexible with loan paybacks, whereas alternative funders offer a variety a payment options, including adjusting the monthly payments to the business’ profit or loss.
Bank loans are a thing of the past. Major financial institutions are not interested in funding the little guys, so these entrepreneurs have found funding in the world of alternative financing.