Even with a strong credit history, your loan application can be rejected for low revenue, not enough years in business, poor credit, or a high debt-to-income ratio.
However, alternative lenders, also known as small business lenders, offer another option. Free from cumbersome internal bureaucracies, these online lenders provide fast, flexible financing designed for small businesses.
Yet entrepreneurs often overlook the lesser-known alternative of working with small business loan lenders. This is a missed opportunity that could enable you to get a loan amount that benefits your business.
In this post, we’re going to list and explain five benefits of working with a small business lender. Before we get into that, though, we’ll quickly clarify how small business lending differ from traditional bank financing.
Alternative Lenders vs. Banks
Alternative lenders are financial institutions that provide small businesses with financing options such as:
- Merchant cash advances
- Equipment loans
- Bridge financing
- Accounts receivable financing
- Online term loans
- Invoice factoring
- Business lines of credit
Banks, on the other hand, are much more restricted in their offerings. Most of the financing options that they provide are commercial term loans and credit lines.
Another easy way to tell alternative lenders and banks apart is how they themselves are financed. Whereas an alternative lender is often backed by investors, banks rely on deposits for liquidity. Or, they sell the business loans they make to investors on the secondary market.
The fact that small business lenders are financed by investors rather than depositors is partially why they can provide the benefits you’ll see below.
Why Should a Business Owner Select a Small Business Lender Over Bank Financing?
1. Purpose-built Financing
Unlike a bank, which typically provides general commercial loans, small business lenders specialize their offerings.
By specializing in certain niches, these lenders can structure their financing around specific purposes, such as:
With purpose-built financing, entrepreneurs can get loan options that work extremely well in very specific scenarios.
At Fora Financial, we know that business owners are different, so their use of funds will vary as well. We encourage business owners to use their financing how they see fit!
2. Flexible Repayment Terms
Small business lenders can offer unique kinds of repayment flexibility. For example, merchant cash advances and invoice financing both have different kinds of repayment flexibility.
With a merchant cash advance (MCA), the business remits payments based on credit or debit sales. Therefore, the more sales the business makes, the larger their remittance will be, and vice versa.
With invoice financing, the business sells its invoices at a discount in exchange for cash. Due to this, the repayment is made to the business lender when the invoice is paid.
Banks and more traditional lenders simply don’t offer options like MCAs or invoice financing. Other than credit lines, their offerings must be based on fixed, inflexible payment schedules. Due to this, many business owners struggle to qualify for bank financing. And if they do receive a bank loan, the strict monthly payments may hurt their business if they have a slow sales month.
3. Less Stringent Approval Criteria
Approval percentages at big banks were just 13.5 percent in May 2021.
During that same time, small business lenders had approval percentages of 23.3 percent. Much of this disparity comes down to the comparatively stringent approval criteria of banks.
Traditional banks are much more conservative in approving small business loans. Due to this, they require excellent credit scores and a long history of consistent financial performance. Because they have such strict requirements, the application process can be long and strenuous for business owners.
Small business lenders are much more lenient in their credit requirements. In fact, certain types of financing, such as invoice financing, rely on factors other than your credit score in determining loan approval.
4. Long-term Relationships
As mentioned, small business lenders tend to be smaller and more specialized. As a result, these financing lenders can offer more personalized, one-on-one service to their customers. This allows you and your lender to establish and build a long-term working relationship.
Once you’ve established that relationship, it’s easier for the lender to tailor their service to your specific needs. With larger, more bureaucratic lending institutions, that kind of personal relationship is difficult to establish.
In addition, if you have a good experience with your lender, they may be able to offer you financing again in the future. Once you pay off your existing loan, you may qualify for a renewal financing option, which often comes with a shorter approval process. This can be especially beneficial if your business needs financing as fast as possible.
5. Quicker Disbursement of Funds
The speed with which you receive funds from your small business lender varies based on the type of financing.
For example, merchant cash advances and invoice financing are typically faster to disburse funds than an online term loan. However, even the slowest small business lender will be significantly faster than a traditional bank. In some cases, you may receive an answer on whether or not you qualify for financing in as little as 24 hours.
Conclusion: Take Time to Select the Right Small Business Lender
As you can see, the benefits of working with a small business lender are quite compelling. Still, that doesn’t mean all small business lenders and all small business loans are created equal.
As with any kind of financing provider, some provide better customer service than others. Plus, there’s considerable variability between the offerings of many small business lenders.
Therefore, even if you’re sold on working with alternative lenders in general, there’s still research to do to find the best small business lender.
A great first step is to start learning about the different types of alternative loan options. That way, you can identify the financing that fits your needs and then search for the lenders that offer it. Here are a few resources you can use to start learning the basics of various alternative loans: