Alternative Financing Vs. Traditional Bank Loans
Two things are almost certainly eventually going to come up in any kind of business that you’re running – sudden opportunities and unforeseen problems. What they have in common is that they both often put you in a position where you can benefit from a cash infusion. When you start looking for a loan, you will encounter a choice of traditional bank loans or alternative financing. Alternative financing means getting a loan from a non-bank source, and the differences include the loans amounts, payment terms, and your ease and speed in getting the loan approved.
Banks typically prefer to approve business loans that are at least for 1 million dollars, and rarely loans that are for under $200k. Alternative lenders, on the other hand, are much more flexible with loans amounts and might be willing to lend you as little as a few hundred dollars. This is why bank loans are used more often to finance major business undertakings, while alternative financing can help with the month to month challenges that are likely to crop up in your business.
The reason why alternative lenders are able to offer smaller loan amounts is because they come with higher interest rates and shorter windows for repayment. Banks usually do not give out these types of loans because they consider them less profitable, especially taking into account the banks’ lengthy application reviews. Instead, banks prefer to make money on long-term interest of loans for a at least a year, with possible punishment for early repayment.
Fast turnaround times are one of the major benefits of alternative funding sources, with many loans getting approved in just 1-2 days or even hours, compared to 1-3 months with banks. This is because of a simpler application process, which sometimes only consists of filling out an online application and answering some questions. Banks, on the other hand, require you to submit such information as personal and company financials, solid credit reports and past and projected earnings, and also to put up collateral. As you can guess, less stringent application processing with alternative lenders also means that you’re more likely to actually have your loan approved.
These are all your major differences between alternative financing and traditional bank loans, and they affect nearly every aspect of taking out a loan. If you choose alternative funding, the application process will be easier and faster, you can borrow smaller amounts, and you can repay faster, but with higher interest rates. What all of this basically means is that you will have much more loans available to you, and you don’t have to devastated by sudden challenges or let great opportunities to pass you by.