If you are a business or a consumer who has been turned down for a traditional bank loan, where can you turn for funding? In the past, the answer was often limited to family and friends.
However, there are now many alternate funding sources available to you and they are almost all internet-based. The most popular are microloans; crowdfunding; merchant cash advances; and peer-to-peer lending.
Exactly what are these options all about -- and are they right for you? Let’s look at some facts.
- Microloans are small loans from $500 to $50,000 that do not require collateral. Repayment can be over a period as long as five years, which makes the terms very affordable.
- Crowdfunding raises small amounts of capital from a large number of investors, usually using social media. This platform can be effective for small businesses, who can offer investors partial ownership through “equity crowdfunding.” However, it’s not uncommon for individuals to use crowdfunding as a way of raising money for medical emergencies or special events, such as a wedding.
- Merchant cash advances are funds provided to a business in exchange for a percentage of the company’s credit card and/or debit card income. This is not a loan, so there is no need for collateral; the business is selling a portion of future credit and/or debit card sales. This option is especially attractive for restaurants, retailers, and other businesses that do a large, steady volume of card transactions.
- Peer-to-peer lending, often abbreviated as P2P lending, is done almost exclusively online as an option for individuals, companies, and even charities. The most popular platforms are Lending Club, Prosper, Square, and SoFi.
Their decision-making is very personal and local, so they are better able to adapt and customize to your financial needs. You must be a member to do business at the credit union, but credit unions are often operated by large companies; industry trade groups, such as teachers associations; and community groups, such as a homeowners association.
Alternate funding started growing in response to the financial crisis that began in 2008 and lasted into the early 2010s. It was a time when banks tightened credit to the point that loans were almost unavailable to either businesses or individuals.
Today, getting a bank loan remains a challenge if you fall into one of these three groups:
- A business that has been operating for less than two years
- A person with a credit score below 640
- A business or a person who needs to borrow less than $250,000 – traditional banks typically don’t consider lower loan amounts to be worth their time or effort
- Approval is fast – sometimes within hours and almost always within one week
- Interest rates are competitive – as more alternate lending sources have entered the marketplace, they have had to be more competitive with each other; and their rates are always lower than such familiar options as credit card financing and payday loans
- Customer service is strong – like many internet-based companies, alternate lenders are conveniently available online during non-traditional business hours
Alternate lenders typically don’t have physical locations; require minimal infrastructure; and face minimal regulatory mandates from state and federal agencies. This means lower operating costs, which the firms are able to pass on to borrowers in the form of lower interest rates.
As a result, alternate lenders are expected to originate about $150 billion annually in loans by 2020. The word “alternate” certainly doesn’t mean “exotic” or “undependable” – and for your funding needs, the word “alternate” may be just right.
Navin Shah is Chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers. He is also Vice Chairman of Embassy National Bank, a community bank in Lawrenceville that he helped establish in 2007 and has become one of the leading SBA “Preferred Lenders” in the southeast. He can be reached by e-mail at firstname.lastname@example.org